Brazil’s president, Dilma Rousseff, and her finance minister, Guido Mantega, are attacking the U.S. Federal Reserve for aggressively buying bonds and driving the exchange rate of the dollar down. This will hurt Brazil and other developing-country exporters, Mantega says, and what’s more, it’s meant to.
1. How does the purchase of bonds by the Fed lower the exchange rate of the dollar? Explain.
2. What can the Central Bank of Brazil do to prevent the Brazilian currency from appreciating relative to the dollar? Explain.
3. What will be the effect of this action of the Brazilian Central Bank on the Brazilian economy?