My belief is that inflation is good for economic growth, as
when people expect there is inflation in the future, people are likely to spend
more of their wealth in consumption and investment, which help to speed up
economic growth. This may imply when there is higher inflationary pressure, the
marginal propensity to consume and invest is very likely to increase, this can
lead to higher economic growth rate. However, when there is hyperinflation, the
economy is definitely in its recession and the market is almost impossible to
solve the problem by itself. When Germany experienced its hyperinflation in
late 1920s, its economy was in a very bad shape until Hitler’s government took
a complete control of the domestic economy. Why is a hyperinflation unable to
increase economic growth by increasing individual marginal propensities to
consume and invest?
I think that when there is a hyperinflation, people and
companies face a significant constraint which is time. During a period of hyperinflation,
if people and companies use the currency as exchange median (incomes), the
marginal substitution of working (production) to consumption (closing down)
becomes extremely significant that individuals become more willing to give away
more of their working hours in order to travel to store and make consumption,
it is also the same for companies that they are more willing to close down
production to avoid increasing risk in the economy.
Overall, there is a hyperinflation, the constraint to time
becomes more limited and the price of time becomes increasingly valuable that
people even cannot afford spending for earning more incomes.
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