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

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The independence of central banks is often correlated with lower levels of inflation. By eliminating the independence of the Venezuelan central bank, it is likely that inflation will increase. This increase in inflation would cause the value of the Venezuelan bolivar to decrease relative to the US dollar, leading to a fall in the real exchange rate between the two countries.

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