In 2016 Venezuela was expected to experience inflation of up to 700%. Given that central bank loss of independence tends to lead to 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 Canada is the "domestic" country).
A)rise in Venezuela relative to Canada; fall
B)fall in Venezuela relative to Canada; fall
C)rise in Venezuela relative to Canada; rise
D)fall in Venezuela relative to Canada; rise
E)fall in Venezuela relative to Canada; remain unchanged

Question

Quizplus · Accepted Answer

Loss of central bank independence is typically associated with an increase in money supply, which leads to inflation. As inflation increases in Venezuela, the prices of goods and services will rise, causing inflation in Venezuela to rise compared to Canada. Additionally, the real exchange rate will fall as inflation erodes the purchasing power of the Venezuelan currency relative to the Canadian currency. Therefore, the correct answer is A, a rise in inflation in Venezuela relative to Canada and a fall in the real exchange rate between the two countries.

In 2016 Venezuela Was Expected to Experience Inflation of Up