A Booming Brazil
Subject Economic Growth
Topic International Finance
Key Words Devaluation, Reserve Requirements, Economic Growth, Investment
News Story

Brazil's economy appears to be on the road to recovery. Economic growth in the second quarter was 3.92 percent higher than in the same period a year earlier. The performance of the economy in the second quarter increases the likelihood that the government will reach its growth target of 4 percent. Economists expect next year's economic growth to be between 4.5 and 5 percent.

In late 1998, Brazil underwent a severe currency crisis that resulted in the devaluation of the real, Brazil's national currency, in January 1999. Economic growth fell to less than 1 percent and investor and consumer confidence was shaken. But that was last year. As the economy began to slowly recover and unemployment fall, the central bank stimulated the economy with reduced interest rates and lowered reserve requirements. These measures increased the availability of credit and made it cheaper, spurring economic recovery. Businesses responded with increased investment and the decrease in the cost of credit is expected to increase consumer spending in the second half of the year.

Increased agricultural production was a major source of second-quarter economic growth. Growth in Brazilian agricultural staples such as coffee and soybeans was 10.75 percent. Industrial production rose buy 4.34 percent and was considered to be a strong sign of continued expansion. For the first six months of 2000, Brazil's gross domestic product grew 3.84 percent more than during the same period of 1999.

(Updated September 1, 2000)

Questions 1. Explain the concept of a 'reserve requirement.' How does a change in the reserve requirement affect the supply of money?
2. What happens to a country's exports, imports and gross domestic product when it devalue its currency
3. The central bank of Brazil lowered the bank's reserve requirements and market interest rates to stimulate a recovery. Explain how these policies are supposed to work.
Source Jennifer L. Rich, "A 'Solid Recovery' Is Seen in Report on Brazil Economy," The New York Times, August 10, 2000.

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