The unexpected cut in Brazil homework:

1) What is the relationship between the macroeconomic objectives of inflation and economic growth?

The governments general aims are to decrease the inflation and keep the economic growth. In Brasil the GDP has been rapidly increasing since last years. The supply however has not been growing proportionally fast, which naturally led to the inflation increase. That is why The Monetary Policy Commitee, in orderd to keep the inflation under control, would keep increasing the interest rates.

2) Why are there concerns that the recent reduction in the interest rate may worsen inflation? Do you think that a decision has been made to sacrifice Brazil’s inflation-targeting regime to protect its economic growth?

The previous increases of the i.r. were supposed to prevent the Brasilian economy from over-heating.  The slash of the interest rates, implied mainly due to the political reasons, seemes to have been rather irrational and dangerous for the society. That is because the prices and the cost of living will most likely grow. The government should not only focus on the GDP statistics, but also remember that it is responsible for the whole society. Maybe the investments would  develop quicker, but the people will for sure be affected, spend less and, therefore, the countrys GDP might actually fall. 

3) Why are there questions over the independence of the central bank and how will this affect its credibility? What are the arguments for central bank independence?

The questions over the independecnce of the Brasilian Central Bank are naturall. This institution, under a high political preassure, changed its reasonable policy into a risky, pro GDP-developement strategy. Cenral Bank and MPC are separated from the government to prevent such a situations from happening. When these institutions give in the political preassure its credibility fall, because they are no longer being concidered as a independent and, therefore, competent body.

4) Growth in Brazil, although lower this year, still remains very strong. Why has the Brazilian economy been able to continue its strong growth, despite worsening economic conditions worldwide?

Brasil owes its good economical situation mainly to the vast natural resourcess. The oil being exploit, makes Brasil self-sufficient in the petrol area. Moreover, Brasil is a Worlds major agrcultural goods exporter. Due to the wonderful climate conditions, this country grows tropical friuts, potatoes, sweet corn and many more. Brasil has also very big industry, including green energy industry (of which Brasli is one of the leaders) and car industry ( f.i. Mercedess-Benz factories).


5) What type of inflation are emerging economies experiencing? Explain how continuous hikes in interest rates have aimed to bring it back under control.

Emerging economies often face a demand pull inflation. That is because their GDP grows quickly, their people start to make more money, but the supply is not sufficient. Keeping the interest rates at the high level makes the loans more expensive, therefore, the investment developement is slower, consequently, the GDP rises slower and that decreases the demand. 

6) What is meant by overheating? How will the central bank’s past and current policies contribute towards it?

Overheating means that the demand is bigger than supply. It naturally causes the demand pull inflation (see paragraph above).  When Brasilian Central Bank lowered the interest rates, the investments level grew, the GDP could increase faster and ,therefore, the demand increased. So too high demand, in comparison with supply.