Suppose Brazil Has a Floating Exchange Rate, and It Faces

question 18

Multiple Choice

Suppose Brazil has a floating exchange rate, and it faces domestic inflation and a trade deficit.Assuming it desires overall balance, if Brazil shrinks its money supply, other things equal one would expect which of the following to occur?

• A) inflation to become more severe and the trade deficit to become less severe, an example of policy agreement
• B) inflation to become more severe and the trade deficit to become more severe, an example of policy conflict
• C) inflation to become less severe and the trade deficit to become less severe, an example of policy agreement
• D) inflation to become less severe and the trade deficit to become more severe, an example of policy conflict

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Definitions:

Current Ratio

A liquidity ratio calculated as current assets divided by current liabilities, indicating the ability of a company to pay short-term obligations.

Current Liabilities

Debts or obligations that a company expects to pay off within one fiscal year, including accounts payable, short-term loans, and accrued expenses.

Current Assets

Assets that a company expects to convert into cash, sell, or use up within one year or within its operating cycle if longer than a year.

Reversing Entries

Journal entries made at the beginning of an accounting period to reverse or cancel out adjusting entries made at the end of the previous period.