Suppose Brazil has a fixed exchange rate, and it faces domestic recession and a trade surplus.Assuming it desires overall balance, if Brazil revalues its currency, other things equal one would expect which of the following to occur?
A) the recession to become less severe and the trade surplus to become less severe
B) the recession to become more severe and the trade surplus to become more severe
C) the recession to become more severe and the trade surplus to become less severe
D) the recession to become less severe and the trade surplus to become more severe

Question

Quizplus · Accepted Answer

If Brazil revalues its currency, it becomes more expensive for other countries to buy Brazilian goods. This reduces the demand for Brazilian goods and causes the trade surplus to become less severe. However, the increased value of the currency makes Brazilian goods more expensive for domestic consumers and foreign consumers, which reduces the quantity of goods demanded and can exacerbate the recession, making it more severe. Therefore, the correct answer is that the recession would become more severe and the trade surplus would become less severe (Option C).

Suppose Brazil Has a Fixed Exchange Rate, and It Faces