Question

In some periods, Venezuela's inflation rate was very high. Explain why this places pressure on the Brazilian currency. In what ways will this negatively impact the country?

Answer 1

In Venezuela there is hyperinflation which is an increase in the general price level by more than 1000 percentage. Generally an increase in the inflation rate is a complaint by currency depreciation. This occurs because price of a currency matters a lot in determining the exchange rate. When Venezuela inflation rate is increasing at a rapid pace, Venezuela currency will depreciate sharply. Countries that trade with Venezuela will experience a sharp appreciation in their currency. This will make their imports cheaper and experts expensive. An appreciating currency will worsen the trade deficit. This will lead to current account deficit. In this way Brazilian currency is experiencing a danger of sharp appreciation where this would result in a current account deficit and a lower economic growth.