Hyperinflation

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Definition of Hyperinflation:

Hyperinflation is a period of extreme inflation. The price level increases 50 percent or more in a month.

Detailed Explanation:

In 2008, the inflation rate in Zimbabwe hit 231,000,000 percent. Imagine a candy bar that cost $1.00 in 2007 costing $2,310,000 one year later! People stopped using their money. Bartering became the norm. When they did pay with money, the currency of choice was the American dollar. Fortunately, Zimbabwe’s inflation is more under control, and the country has begun to emerge from the devastation caused by hyperinflation. To learn more, read “In Dollars They Trust,” published in The Economist on April 27, 2013. 

Germany also suffered from hyperinflation following World War I. Imagine sitting down to dinner at a restaurant. You order your meal and by the time you finish eating, the price has gone up! This actually occurred in Germany after World War I. Restaurants did not even print menus because the prices changed so dramatically. Patrons negotiated the price and paid in wheelbarrows full of cash. 

The extreme inflation in Zimbabwe and Germany is called hyperinflation. Hyperinflation results in the devaluation of money so rapidly that people find that the goods they own hold their value better than the currency. Business owners do not know what to charge. Customers do not know what a fair price is. They hoard the items so they can barter, or trade for goods and services in the future. They also spend their paychecks as soon as they receive them to avoid “losing” their money through sharp price increases. Banks do not lend because they do not want to lend currency today that may be worthless tomorrow. 

It is highly unlikely that hyperinflation will occur in the United States, however it is not inconceivable. Assume our national debt was so high that investors refused to purchase government bonds. How would the government pay its obligations? Instead of taxing its citizens, the government out of desperation chooses to print money - lots of money. Theoretically this could result in hyperinflation. 

A central bank’s job is to prevent hyperinflation. Normally, action is taken prior to inflation getting out of control. The central bank tightens the money supply, pushing up interest rates and slowing the increase in the economy’s aggregate demand and the rise in the price level. 

Dig Deeper With These Free Lessons:

Inflation
Causes of Inflation
What is Money
Monetary Policy - The Power of an Interest Rate 

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