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1. Suppose that Brazilianfirms become more optimistic and decide to increase investment expenditure today in new factori...

1. Suppose that Brazilianfirms become more optimistic and decide to increase investment expenditure today in new factories and office space.How will this increase in investment affect Brazilian output, interest rates, and the current account?

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Answer #1

Increase in investment spending is likely to increase the aggregate demand in the economy. As the aggregate demand curve shifts to the right in the goods market, there is an increase in the general price level and the real GDP. Brazilian output therefore increases

Higher prices will be translated into increased nominal interest rate over time because of increased inflation. With increased interest rate, capital inflow will increase which means there is a decline in net exports at there is a net capital inflow. As currency depreciates current account will deteriorate.

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