BRAZILIAN ECONOMY Brazil's economy is primarily supported by well-developed agricultural, mining, manufacturing, and service sectors. Brazil's economy dwarfs that of every other country in South America, and Brazil is expanding its presence in global markets. Since 2003, Brazil has shown steady improvement in macroeconomic factors, increased its foreign exchange reserves, and reduced its debt profile by shifting its debt burden to locally held instruments. After strong growth in 2007 and 2008, Brazil was no exception to the global financial crisis in 2008. 2008. Brazil experienced two quarters of recession, as global demand for Brazilian commodity exports declined. However, Brazil has shown signs of recovery as a leading emerging market. In 2010, following growing consumer and investor confidence, the GDP growth rate reached 7.5%, the highest growth rate in the last 25 years. Due to high interest rates, Brazil is an attractive destination for foreign investors. Due to the high inflow of capital, the currency appreciated and hurt Brazil's manufacturing sector, forcing the government to intervene in the foreign exchange market and increase taxes on foreign capital. President Dilma ROUSSEFF maintained the previous administration's commitment to central bank inflation targeting, a floating exchange rate and fiscal restraint. The administration implemented more expansionary monetary policy in 2012 to spur economic growth, but these efforts failed to boost growth as expected. Brazil adopted inflation targeting for 1999, just after adopting the floating rate exchange rate system. In such a regime, monetary policies directly influence household borrowing rates, corporate financing costs and exchange rates. Monetary Policy Cent...... middle of paper ...... For example, if the government increases purchases but keeps taxes constant, it directly increases demand. On the other hand, if the government reduces taxes, household disposable income increases and people will spend more on consumption. This increase in consumption will in turn lead to an increase in overall demand. Fiscal policy also changes the composition of aggregate demand. When the government runs a deficit, it issues bonds to meet some of its expenses. In this process, it discourages private investment. Holding other things constant, a fiscal expansion will raise interest rates and displace some private investment, thereby reducing net output. In an open economy like Brazil, fiscal policy also affects exchange rates. During a fiscal expansion, interest rates rise due to government borrowing, which attracts foreign investors and hence the exchange rate appreciates in the short term..