Tuesday, 24 October 2017

Inflation, hyperinflation and economic crisis



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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