Question

1. Economists agree that increases in the money supply growth rate increases inflation and that inflation is undesirable. So why have there been hyperinflations and how have they been ended?

Answer 1

Hyperinflation occurs when the government of a country decides to print money to pay for its spending. As money supply increases, prices are rising as in regular inflation. One of the two causes of inflation is an increase in the supply of money. The other is inflation that pulls demand. It happens when an increase in demand exceeds supply, sending higher prices. But the government continues to print more instead of tightening the money supply to stop inflation. Prices are skyrocketing with too much money floating around. They foresee increased inflation until customers realize what is happening. So stop paying a higher price later, they buy more now.

Hyperinflation has two winners. Next, there are those who have borrowed. We find that higher prices in contrast make their debt useless until it is virtually wiped out. Exporters were champions as well. Local currency's declining value makes exports cheaper than foreign competitors. Exporters are getting hard foreign currency, which is increasing in value as the local currency falls. During the Civil War, the only time that the United States experienced hyperinflation. The state of the Confederate printed money to pay for the war. If hyperinflation were to happen again in America, it would be measured by the Consumer Price Index. When you test the actual rate of inflation, you'll see that it's almost hyperinflation nowhere— not even in the double digits. Inflation is currently too small. For economic growth, mild inflation is good.

Through monetary policy, the Federal Reserve is avoiding hyperinflation in America. The primary job of the Fed is to control inflation while avoiding recession. It does this by restricting and releasing the supply of money, which is the amount of money allowed to enter the economy. Strengthening the supply of money reduces inflation risk while loosening it increases inflation risk. The Fed has an annual inflation target of 2%. That's the core rate of inflation, leaving out volatile prices of oil and gas. Based on the market in goods, they move up and down rapidly. It affects the price of food transported by trucks over long distances. Most of the Fed's assets are residing in bank reserves in the banking system. It didn't go into circulation. The Fed can quickly raise its reserve requirement and lower the money supply if the banks start lending too much.