Chapter 16, Question 6

According to Stone, hyperinflation occurs when the inflation rate is extremely high and this high rate can have a devastating effect on the economy (436). These increases happen quickly and happen because it goes unchecked. The inflation rates in under hyperinflation usually go to 100% rate to as much as 1000% (economicshelp.org). What causes hyperinflation could be excessive government spending of tax revenue (high deficits) along with printing of money to finance these deficits (Stone 436). Why is this devastating? One reason, if there is not enough tax revenue collected and too much currency being printed, this can cause the value of currency to decline and at the same time prices increase. When this happens, the value of savings is quickly reduced and the value of investments begins to fall. What this means is, the rate of inflation goes above the interest rate of savings accounts and investment accounts (economicshelp.org). After a while, currency, the banks, pensions and other financial instruments become worthless.

If hyperinflation is at its worse, families or workers themselves rush to the stores and buy anything they can use the money to purchase. This can cause people to begin hoarding of necessities. Once this occurs, you can no longer have a monetary system and stores and people turn to bartering (Stone 436). There is no longer a monetary system because the precious metals (gold, silver, etc.) and foreign currency that have been backing the system leave the economy. Just like in the Great Depression, people will no longer trust money. Finding places that accept money will be few and far between. All of these things make hyperinflation devastating to families as it impacts their assets in a negative way.

To stop hyperinflation, the government needs to stop spending the tax revenue and a need to start