The Venezuelan bolivar (VEF) is currently officially pegged to the U.S. dollar at a rate of $0.10/bolivar. However, in practice no one cares about this pegged rate because capital controls prevent anyone from actually trading at this rate. Without capital controls, investors would bankrupt the Venezuelan government by demanding dollars in exchange for bolivars. Which scenario is consistent with this description

Question

08-05-2021
Business

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The Venezuelan bolivar (VEF) is currently officially pegged to the U.S. dollar at a rate of $0.10/bolivar. However, in practice no one cares about this pegged rate because capital controls prevent anyone from actually trading at this rate. Without capital controls, investors would bankrupt the Venezuelan government by demanding dollars in exchange for bolivars. Which scenario is consistent with this description

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jepessoa jepessoa · Answer 1 · 2021-05-09T08:47:21+02:00

Answer:

the options are missing, so I looked for a similar question:

A. A black market exchange rate of $0.05/VEF because the government peg overvalues the bolivar

B. A black market exchange rate of $0.20/VEF because the government peg overvalues the bolivar

C. A black market exchange rate of $0.05/VEF because the government peg undervalues the bolivar

D. A black market exchange rate of $0.20/VEF because the government peg undervalues the bolivar

The answer should be:

A. A black market exchange rate of $0.05/VEF because the government peg overvalues the bolivar

The bolivar should be worth much less if anyone could buy or sell dollars freely, thereofre, this means that the bolivar is overvalued by the Venezuelan government.