Question: Could you please answer this question, I have my own answer but I am not sure about it QUESTION: [Throughout this question, consider Brazil as

 Could you please answer this question, I have my own answer

Could you please answer this question, I have my own answer but I am not sure about it

but I am not sure about it QUESTION: [Throughout this question, consider

QUESTION: [Throughout this question, consider Brazil as the domestic economy and the Brazilian real as the domestic currency] Imagine the following scenario: In 1998, Brazil had a fixed exchange rate against the US dollar at EBR/US$ = 1.2 - that is, 1.2 Brazilian reals (BR) per dollar (US$). The crises in Asia and the deterioration of the international financial markets posed a serious challenge to the stability of the Brazilian real. As a result, investors became afraid of a devaluation (depreciation) of the Brazilian real and decided to leave the country and look for safer havens for their money, for example in dollar-denominated assets. a) Starting from an equilibrium, use the figure below to show how capital outflows from Brazil put pressure in the Brazilian foreign exchange market, AND how the Central Bank of Brazil can intervene to avoid the Brazilian real devaluation (depreciation). Briefly explain. Brazilian Real / U.S. Dollar (EBRUSS) Suss E BR/USS = 1.2 Duss US$ (quantity) b) Show and explain how the intervention in the foreign exchange market in (a) will change the balance sheet of the Central Bank of Brazil (see table below). You do not have to use actual data, just show and explain which components of the balance sheet would change (for + ). Central Bank of Brazil: Balance Sheet Assets Liabilities Foreign Assets (FA) Monetary Base (MB) Domestic Assets (DA)

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