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Question:



4. Although inflation is always and everywhere a monetary phenomenon, explain why: the start of a hyperinflation is typical


Answer:


Inflation always and every where in a monetary phenomenon. Accroding to monetarist school of thoughts, inflation is always monetary phenomenon. Suppose central bank introduce confectionary monetary policy in an economy, it leads to increasing quantity of money supplied in an economy and interest rate going to down in an economy because of increasing supply of lonable fund. Increasing money supply in an economy leads to increasing nominal income of people and aggregate demand of commodies are increasing, which leads to continuousincreasing general price level in an economy which also leads to inflation in an economy. So according to monetarist schools of thoughts, inflation is a monetary phenomenon.They advocated that if central bank increasing money supply in an economy which will leads to demand pull inflation in an economy. So inflation always a monetary phenomenon.

Hyper inflation is a situation which Inflation rate increase more than twenty percentage up to a hundred percentage. This creates economy more worse. Is hyper inflation is related with fiscal policy of an economy. Bad fiscal policy is a one of the reasons for hyper inflation. There is also other reason like poor governmental policies, internal and external conflicts, oil price Crisis, etc which also create inflationary pressure upward. If economy move to hyperinflation situation. Purchasing power of a currency deeply declined. It also affects every macro economic variables like employment level, interest rate, etc. Hyperinflation situation exists in an economy, people lost confidence of an economy. End of a hyperinflation inflation mostly by introduction of a new currency in an economy. Old one replaced by new currencies. It helped to remove of hyperinflation from an economy. So end of a hyperinflation based on fiscal policies in a country. New fiscal policy will stimulate economic activities during hyper inflation period.

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