Your work for a multinational U.S. corporation has involved you in economic and financial analysis of foreign
countries. The firm had been contemplating a major expansion in Brazil, The firm produces for both the Brazilian and
the foreign export market. Given Brazil’s checkered economic past, several members of the senior management team
are questioning such a move. Your boss who had been pushing expansion has heard about the exciting things that you
have learned in Global Finance, and is now asking for your help. Write a five- to six-paged typed memo that
addresses the following questions. Graphs and/or statistical results can take up extra pages as needed.
In answering these questions rely on the theory you have learned, use the data provided and make your assumptions
explicit.
The paper is an analytical exercise. I am not very interested, say, in what some else wrote about inflation and its causes
in Brazil, but in whether you can combine data and theory to arrive at conclusions on your own.
If you do consult outside sources, you are to follow accepted scholarly practices. Any material – arguments,
additional data, etc. – that you take from other work has to be footnoted and referenced. If you are taking material
verbatim you must indicate that by quotation marks. If you are summarizing someone else’s argument, a footnote or
text reference of the form (Dwyer, 1999) is generally sufficient. Failure to do so is plagiarism, a practice that will not
be tolerated.
Your answers are due on or before May 3. Please email your answers to me at jrmlothian@aol.om. Please include your
surname as part of the filename, as in something like “Jones_CIGPaper.doc” .
Data are posted in an excel file.
(1) Inflation had been a major problem in Brazil historically. In recent years, however, it has been relatively low,
but has started to pick up.
(a) What explains the pattern of inflation historically?
(b) Make some assumptions about monetary policy and use the quantity equation to provide a forecast for inflation
over the next two years.
(2.) Real GDP growth has varied greatly over the period since 1975. Currently it is negative. What do you expect
it to be over the next two years and why?
(3) The Real per US Dollar exchange rate has depreciated over the past several years. A key to assessing the future
course of the exchange rate is the purchasing-power-parity relationship. How has relative PPP done as an indicator of
Brazilian exchange rate behavior both over the longer term and more recently? What does it suggest about the future
course of exchange rates?
(4) Short-term interest rates in Brazil have been in the low double digits in recent years while comparable US rates
have been even lower. What does this gap suggest about exchange-rate behavior?.
(5) Should the company go ahead with its Brazilian expansion plans? Why or why not?
