Economic Analysis
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1. Explain why hyperinflation has such a devastating impact on economies. Explain what it takes to stop hyperinflation.
2. Why is there free trade between states in the United States but not necessarily between countries?
3. When the world's economies are on a fixed gold standard and the discoveries of gold do not keep pace with the growing world GDP, what happens?
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1. Explain why hyperinflation has such a devastating impact on economies. Explain what it takes to stop hyperinflation.
Hyperinflation has a devastating effect on the economy because first it increases the consumption ratio because money becomes widely available. Then the fixed income people are hurt, there are lower national savings, and hoarders try to get rid of cash before it loses value. This hurts the economy. Further, there is an increase in uncertainty, income diffusion, and taxation at higher tax brackets. The economy is destroyed because hyperinflation causes sharp business cycles compelling several companies to go out of business. Imports become difficult as rising prices devalue the currency. The purchasing power of the currency in international markets goes down. The economy is hurt because the wealth gets transferred from the public to the government (2). The borrowers gain at the expense of lenders because they can now repay their debt with currency of low value.
Hyperinflation can be stopped by restoring the faith in people that the currency will hold its value. There must be a return of confidence in the currency. One method of doing this is to implement a fixed exchange rate pegged to a strong currency. For example, the Peso can be pegged to the Dollar. This creates an obligation on the central bank to exchange the local currency for the reserve currency at a fixed rate. The second method of restoring confidence is to devalue the currency to an exchange rate that is credibly defensible. After credibility is ...
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- BSc , University of Calcutta
- MBA, Eastern Institute for Integrated Learning in Management
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