2,041
Team 5
Hyperinflation:
"Is defined as inflation that exceeds 50% per month, the price level increases more than a hundredfold over the course of a year" (Mankiw, 652)
Pengo Inflation in Hungary
where this man sweeps up
the useless currency, this
case was one of the most serious hyperinflation ever recorded.
- leads to the population reducing their their holding of money.
- most common cases are following wars or social upheaval.
Source: http://en.wikipedia.org/wiki/Hungarian_peng%C5%91
- aftermath of crisis can lead to a lack in tax revenue, and strain on the state to maintain the status quo, that can lead to hyperinflation
Problem 2:
Inflation Tax:
When the government pays its debts by printing money, the value of the money in Winona’s wallet will decline, a phenomenon known as the inflation tax. Winona’s money will purchase fewer burgers after the government’s decision to print money. The government effectively taxes anyone who holds money.
The impact that the government’s decision to raise revenue by printing money has on the value of the money in Winona’s wallet is known as the inflation tax.
-A way of increasing the
government's revenue by
creating money.
・ The price level rises.
・ The value of money drops.
-Depending on countries
・ In the 1770s, the U.S. government used to pay for military spending
By: Gabrielle Celani, Jawid Ali, Masumi Nishio, Phil Wang
Using Money Creation
to pay for government Spendig:
Consider Kharkeez, a hypothetical country that produces only funnel cakes, initially, a funnel cake is priced at $2 Caroline has $100 in her wallet, and with this, she can purchase 50 funnel cakes.
Suppose the government of Kharkeez cannot raise sufficient tax revenues to pay its debts. In order to meet its debt obligations, the government prints money. As a result, the money supply rises by 40% if monetary neutrality holds the 40% Increase in the money supply will cause the price of a funnel cake to rise to $2.80. After the government prints money to pay its debts, the $100 in Caroline’s wallet will purchase 35 Funnel cakes.
The impact that the government’s decision to raise revenue by printing money has on the value of the money in Caroline’s wallet is known as the inflation tax.
Quantity Theory of Money:
a theory asserting that the quantity of
money available determines the price
level and that the growth rate in the
quantity of money available determines
the inflation rate
Fisher Effect:
the one-for-one adjustment
of the nominal interest rate
to the inflation rate
monetary neutrality:
- is the theory that a change in the money supply does not affect real variables like the number of veggie burgers produced. In this case, monetary neutrality holds, and the 10% increase in the money supply is fully reflected in the price of a veggie burger. Therefore, the price of veggie burgers rises by 10% as well. This causes a decrease in the purchasing power of money.
More importantly, the increase in the money supply impacts only the purchasing power of the cash.
If the wage tends to rise with the overall price level, her nominal wage will rise to reflect changes in the quantity of money, and the purchasing power of her earnings from work will not be affected in the long run.
Problem 1:
Consider Tralfamadore, a hypothetical country that produces only veggie burgers.
Initially, a veggie burger is priced at $1.00. Winona has $200 in her wallet, and, with this, she can purchase 200 veggie burgers.
Solution： $200/($1.00 )=200 burgers
Suppose the government of Tralfamadore cannot raise sufficient tax revenues to pay its debts. In order to meet its debt obligations, the government prints money. As a result, the money supply rises by 10%. If monetary neutrality holds, the 10% increase in the money supply will cause the price of a veggie burger to rise to $1.10.
Calculation：$1.00+($1.00 x 10%)=$1.10
After the government prints money to pay its debts, the $200 in Winona’s wallet will purchase 181 veggie burgers. (rounding down to the nearest whole veggie burger)
Calculation： $200/($1.10 )="181" burgers
Case Study:
During the decade of the 2000s, the nation of Zimbabwe experienced one of history's most extreme examples of hyperinflation.
Real Life Case:
"The hyperinflation ended in April 2009 when the Zimbabwe central bank stopped printing the Zimbabwe dollar...In January 2008...the Reserve Bank of Zimbabwe issued a note worth 10 million Zimbabwe dollars, which was then equivalent to about four U.S. dollars" (Mankiw)
- Hyperinflation in Afghanistan
- during Osama's existence
- excess supply of money
- post-colonial redistricting led to bad production, that led to 80% unemployment
- economic sanctions and asset freezes
- directly following a civil war
"Each graph shows the quantity of money in the economy and an index of the price level. The slope of the money line represents the rate at which the quantity of money was growing, and the slope of the price line represents the inflation rate. The steeper the lines, the higher the rates of money growth or inflation." (Mankiw)
Source :
http://www.foreign-money.com/afghanistan-money.html