Hugo Chavez, Venezuela's president, proposed that the independence of the Venezuelan central bank be eliminated. Given the research on the relationship between central bank independence and inflation, we should expect this event to cause inflation to ________ and the real exchange rate to ________ between the two counties. (Assume the nominal exchange does not change, and that the United States is the domestic country).

Question

Quizplus · Accepted Answer

Research indicates that less independence for a central bank often leads to higher inflation because the government may print more money for spending, which devalues the currency. If inflation rises in Venezuela relative to the U.S., the real exchange rate (the price of goods in Venezuela relative to the price of goods in the U.S. when exchanged at the current exchange rate) would fall, making Venezuelan goods cheaper relative to U.S. goods.

Hugo Chavez, Venezuela's President, Proposed That the Independence of the Venezuelan