SUGGESTED ANSWERS TO PLANO CRUZADO
1. What were the likely consequences for Brazil of controlling prices while gunning the money supply?
Consider the effect on production and the availability of products in the stores.
ANSWER. The likely consequences for Brazil would be suppressed inflation, shortages, and a large black market.
2. How did the Plano Cruzado affect Brazil’s huge trade surplus?
3. What would be your forecast of the plan’s effect on Brazil’s ability to service its foreign debts?
4. President Sarnay terminated Plano Cruzado in February 1987, one year after it began. What impact do you
think the plan had in reducing inflation and inflation expectations? How would you go about measuring the
effect of the plan on inflation expectations?
5. What was the likely price response to the removal of price controls?
6. If you were a banker, how would seeing such a plan put into effect affect your willingness to lend money to
Brazil? Explain.
ANSWER. The Plano Cruzado would reveal to any sensible person, including bankers, that Brazil was unwilling to
address the hard political work of economic restructuring. It needed to remove subsidies to state industries and
encourage the private sector. Instead, Brazil chose to let the public sector run out of control with the gap between
revenues and expenditures financed by printing money. It then dealt with the resulting inflation by imposing price
controls rather than by limiting special interest groups’ access to state funds. Under these circumstances, a banker
would be hesitant to risk more money.
Plano Cruzado
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However, Brazil is not home free yet. The new stability brought a flood of capital into the Brazilian stock
market, which in turn led to a jump in the real’s value. Faced with rising imports and slowing exports,