Inflation Brazil Case Study

749 Words3 Pages
Brazil's central bank hopes to lower inflation by keepingbenchmark interest rate unchanged at 14.25%. This interest rate is the highest rate ever in nine years of Brazil to deal with inflation. Interest rate is the amount of charged, as a proportion of the amount lent, that the borrower has to pay for the lender. The central bank is politically independent and often charged with the sole task of maintaining a low and stable rate of inflation. It does so by managing the interest rate. Inflation is defined as a persistent increase in the average price level in the economy, usually measured through the calculation of a consumer price index (CPI).
High interest rates will affect both investment and consumption, which will affect the aggregate
…show more content…
Thus, cost-push inflation will occur and there will be a shift inward of short-run aggregate supply curve from SRAS1 to SRAS2(as shown in figure 2, SRAS shift inward from SRAS1 to SRAS2) leading to an increase in the price level from P1 to P2 and a fall in the real output from Y1 to Y2. A weakening currency which makes fuel and other imports more expensive in Brazil will also lead to an increase in the costs of production to the country’s firms. Therefore, cost-push inflation which occurs as a result of an increase in the costs of productionhigh interest rates should lead to appreciation of currency. Therefore, decrease in prices of imports and costs of…show more content…
First are demand side policies which there are fiscal policy and monetary policy. Fiscal policy will increase income taxes to decrease disposable income, lower corporate taxes to cut back on investment and lower government spending. These will directly impact on aggregate demand to decrease the price level. For monetary policy government could increase interest rates and reduce the money supply. However, in the long run these will have an effect on unemployment that will rise up and getting even worse. Moreover, most people are unlikely to be happy to accept higher taxes as it reduces disposable income and the level of consumption. A reduction of government spending may result in less people will support the government. Demand side policies will bring down the price level (reduce inflation), but they will result in lower national output and rise in unemployment. Therefore, government could use supply side policies to deal with the unemployment situation such as in interventionist supply-side policies will increase the levels of human capital of an economy by support education and training institutions with subsidies or tax benefits and for market-based supply-side policies will reduce trade union power. Trade union power will lower the costs of production to firms and increase the number of workers that firms may hire. Although supply side policies can decrease unemployment,
Open Document