Practice Worksheet Question 2: The coronavirus (Covid-19) pandemic has crashed most economies around the world. Although the pandemic may last more than expected, for this question,assume its effects are transitory.

Assume that the Brazilian economy was in equilibrium before the virus hit.Using Figure 2, analyze theshort-runeffects of a reduction in Brazil's economic activity on the money market and FX market. Consider Brazil as the domestic economy and the U.S. as the foreign investment option. Briefly explain the mechanisms to reach a new equilibrium Brazilian Real/U.S. dollar exchange rate ().

Figure 2