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Economic Development of Central America Econ. 4200 - Spring 2004 – Dr. Taylor - page 28 / 153

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7.  Hyperinflation - Inflation (absolute increase in price level) at very high rates of usually 200 percent or more prevailing for at least one year.

- Caused by one factor … government printing too much money to pay its bills.

- Why is it bad?

A. Uncertainty and therefore higher risk => less investment (both from domestic and international sources).

B. Functions of money destroyed ... store of value, unit of accounting, unit of exchange.

=> No lubricant to machinery of economy => friction=> slows down (revert to barter). Transactions costs soar. Economy slumps into recession.

C. Why is it done? Effectively a tax without increasing official tax rates (government uses money right after it is printed thereby using it when it has the greatest purchasing power...those who receive it later have reduced purchasing power therefore have transferred, unknowingly, some of purchasing power which would have been theirs to the government (inflation tax).

- Especially impacts the poor.

D. Solution... Introduce a new currency or abandon currency ($...Panama, El Salvador and Ecuador have done; plus the US $ accepted almost everywhere).

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