The case : Venezuela’s economy was driven by oil and gas production and exports. Economically…

The case :

Venezuela’s economy was driven by oil and gas production and exports. Economically speaking, the country is suffering from hyperinflation. The Central Bank tries to deal with this issue by increasing the level of interest rates.

1- According to you, what could be the short-run consequences of this increase in the level of interest rates on the direct exchange rate with USD?

2-At the beginning of the 2010s prices were not fluctuating a lot. It took time for the entrepreneurs and the population to take into account the inflation issue.

Imagine that this policy has to be structural, ie: a permanent increase in the level of interest rate. How this long-term perspective may change your previous answer?

Nowadays, entrepreneurs and the population react much more rapidly to monetary policies announcements and to economic news.

3-What is the consequence of this slow adjustment of the level of prices on the nominal exchange rate?

4-How does it change your previous answer?

 

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