2. Suppose that Brazil, which is running a current account (CA) deficit of $4 billion, is initially in a balance of payment equilibrium. at) Brazil's financial account (FA) balance is $4 billion. Brazil can obtain the foreign currency it needs to cover its current account deficit if: i. Foreign investors are willing to buy Brazilian assets (through FBI or portfolio investment), hold Brazilian reais, or lend to Brazilians. ii. Brazilian investors sell their holdings of foreign assets and currency. iii. Foreign central bank are willing to hold Brazilian reais or Brazilian assets (mainly its government bonds). Now, assume that Brazilian investors sell $1.5 billion worth of foreign bonds and hold the proceeds in Brazilian reais (the domestic currency). Since the selling of foreign bonds is a credit entry, the financial account increases by $1.5 billion. There is an excess supply foreign currency. If Brazil has a exible exchange rate, Brazilian real would appreciate. In response to the real appreciation, Brazilian goods, services, and assets are becoming relatively more expensive. As a result, both its CA and FA worsen (i.e., the CA becomes more negative and the financial account gets less positive). If Brazil has a fixed exchange rate regime, i. The central bank will buy foreign currency and sell domestic currency. ii. The international (official) reserves in Brazil will increase. iii. It is irrelevant how much reserves the central bank of Brazil has