Question

If Venezuela does not replace the VEF with the dollar, what do you think will happen to the Venezuelan economy, inflation, and the exchange rate?

Answer 1

Venezuela is facing a major crisis, which is evidenced with the high inflation in quadruple digits and shortages of medicine and food. Consequently the overvaluation of the domestic currency is detrimental; and when the official rate of exchange is fixed and devaluation is not uncommon, people are likely to hold dollars rather their own currency and often sell those dollars when country's currency undergoes devaluation. Thus it is important to replace the VEF with the dollar to control the dysfunctional commerce and industry. When people start making easy money there is a dollar demand and when these are scarce, the black market price increases. It further pushes up inflation and higher inflation pushes again the dollar price. Thus, in an approach, inflation and the rate of dollar feed each other