Which Of These Would Be Called A Hyperinflation - T-Tees - Your Answers Await, Life's Questions Unraveled

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What does it take to make your savings and earnings practically worthless? That answer would be – hyperinflation. Even during the best of times, it is difficult to keep the economy balanced, let alone when prices start skyrocketing at higher percentages every day. The value of money begins to teeter towards zero. To learn about what hyperinflation is, the causes, the effects, the impacts it has, and more, continue reading!

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Hyperinflation definition

An increase in the rate of inflation that is over 50% for over a month is considered hyperinflation. With hyperinflation, inflation is extreme and uncontrollable. Prices rise dramatically over time and even if the hyperinflation stops, the damage will have already been done to the economy and it can take years for the economy to recover. During this time, the prices aren’t high due to high demand but rather the prices are high due to the country’s currency not holding much value anymore.

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What causes hyperinflation?

There are three main causes of hyperinflation and they are:

higher supply of money
demand-pull inflation
cost-push inflation.

An increase in the supply of money is usually due to the government printing large amounts of money to the point that the value of the money begins to drop. When the value of money drops and yet more of it is being printed, this causes prices to increase.

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The second reason for hyperinflation is demand-pull inflation. This is when the demand for goods/services is greater than the supply, which in turn causes prices to increase as shown in Figure 1. This can result from a rise in consumer spending that’s linked to an expanding economy, a spike in exports, or increased government spending.

Finally, cost-push inflation is also another cause of hyperinflation. With cost-push inflation, production inputs such as natural resources and labor begin to get more expensive. As a result, business owners tend to raise their prices in order to cover increased costs and still be able to make a profit. Since the demand remains the same but production costs are higher, the business owners pass on the increase in prices to the customers and this, in turn, created cost-push inflation.

hyperinflation demand pull inflation studysmarter

Figure 1 above shows demand-pull inflation. The aggregate price level in the economy is shown on the vertical axis, whilst real output is measured by real GDP on the horizontal axis. The long-run aggregate supply curve (LRAS) represents the full employment level of output that the economy can produce labelled by YF. The initial equilibrium, labelled by E1 is at the intersection of the aggregate demand curve AD1 and the short-run aggregate supply curve – SRAS. The initial output level is Y1 with the price level in the economy at P1. A positive demand shock causes the aggregate demand curve to shift to the right from AD1 to AD2. The equilibrium after the shift is labelled by E2, which is located at the intersection of the aggregate demand curve AD2 and the short-run aggregate supply curve – SRAS. The resulting output level is Y2 with the price level in the economy at P2. The new equilibrium is characterized by higher inflation due to an increase in aggregate demand.

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