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Econ - Recession, Hyperinflation & Stagflation

This document summarizes different economic conditions including hyperinflation, deflation, depression, and stagflation. It provides examples of hyperinflation in Germany in the 1920s and Zimbabwe in the 2000s that led to their currencies becoming worthless. Deflation during a recession can further slow economic activity as borrowing money becomes a bad deal. Stagflation describes when an economy experiences stagnant growth combined with inflation, as occurred in the US in the 1970s due to rising oil prices. Government policies aimed at addressing economic issues through monetary and fiscal tools can potentially make conditions worse if they increase inflation expectations.

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Gwyneth Malaga
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59 views3 pages

Econ - Recession, Hyperinflation & Stagflation

This document summarizes different economic conditions including hyperinflation, deflation, depression, and stagflation. It provides examples of hyperinflation in Germany in the 1920s and Zimbabwe in the 2000s that led to their currencies becoming worthless. Deflation during a recession can further slow economic activity as borrowing money becomes a bad deal. Stagflation describes when an economy experiences stagnant growth combined with inflation, as occurred in the US in the 1970s due to rising oil prices. Government policies aimed at addressing economic issues through monetary and fiscal tools can potentially make conditions worse if they increase inflation expectations.

Uploaded by

Gwyneth Malaga
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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VIII.

RECESSION, HYPERINFLATION &  no money available to fund new businesses


STAGFLATION
 all uncertainty limits foreign investment and
Germany (1923) trade

 money (Mark) is used as wallpaper and fuel to


the fire
Why is it hyperinflation bad?
 had hyperinflation
Govt pays bills by printing more money

Increase in money supply


 additional money = higher prices
1. ⬆ output
 trillion marks = 1 dollar
2. ⬆ prices
 Mark = useless
3. ⬆ both

Inflation
Zimbabwe
 starts when output >> pushed to capacity >>
 inflation rate -- 489 billion % prices cant rise further
Zimbabwean dollar  but policy makers continue to increase money
supply
 lost 99.9% of its value (2007-2008)
 Output is maximized ➡ more money to print
 prices doubled every 24 hours
➡ more inflation to get
 revised several hours a day
Velocity of Money
Hundred trillion dollar bill  number of times a dollar is spent per year
 largest denomination of currency ever issued  when people spend money quickly >> increase
velocity >> pushes inflation up even faster
Hyperinflation
•Vicious cycle of higher prices ➡ leads to
 when a country experiences a monthly inflation
expectation of higher prices
rate of over 50% or around 13000% yearly
inflation

 erodes wealth Hyperinflation in Germany


Worst inflation in the history  ended when the government replaced worthless
mark with new currency
1. Hungary (July 1945- August 1946)
Zimbabwe
price level = x^(3 x 10^25)
 ended hyperinflation by abandoning currency
altogether
Extreme inflation
 stabilized prices
 forces people to spend as quickly as possible
rather than save or lend  increase in real GDP
Continuing deflation

Depression  borrowing money is a bad deal (no interest)

 real GDP falls and keeps falling for a long time  discouraged people to buy houses and cars
 discouraged businesses

Recession
Money to pay back in the future
 Downturns
➡ more buying power than money borrowed
Effects

1. high unemployment

2. falling prices Stagflation


Deep recessions (what happens?)  stagnant economy + inflation
 more workers than jobs  when output ⬇ or stagnates at the same time
 more output than demand prices ⬆

 both income and prices fall  economy could not produce much

Central banks

 can try to use expansionary monetary policy to US stagflation


speed up economy
 started in 1970
US
 rise in oil prices
Federal govt ower interest rates ➡ encourages
 death of peruvian anchovies (used for animal
businesses and consumers to take out loans
feed and fertilizers)
•change in behavior (if price ⬇️, wait for the lower Fed Govt
prices)
tried to address this by boosting money supply and
if everyone follows, spending declines >> ➡ slower cutting interest rates ➡ output could not rise much
velocity of money ➡ further price declines ➡ [because of low productivity and oil shortage ]
vicious cycle of falling prices >> expectations of lower
prices ➡ actual lower prices
Extra money
Liquidity Trap
 trigerred inflation
 worsening factor in economic downturns
Businesses
including 'The Great Depression
 expect cost to rise further

•interest rates = 0  laid off workers

 Prices keeps ⬇  put economy back to recession


•fed boost money supply again ➡ raised inflation
expectations more

Paul Volcker

 cut money supply

 raised interest rates

 ended stagflation

Hyperinflation, Deflation, Depression & Stagflation

 shows importance of understanding overall


economy

Government action/inaction

 may make things worse

People expect recession ➡ decrease spending ➡ cause


recession

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