Economics Online Tutor

Inflation Special Cases:
Hyperinflation and Deflation
Hyperinflation


Hyperinflation is a situation in which the rate of inflation accelerates to
the point where the entire economy breaks down.  Nobody wants to
receive currency in exchange for goods and services because the
currency will soon lose its value.  It will be worth less than the value of
the goods and services that it was exchanged for.

In an attempt to prevent that from happening, people will rush to spend
the money before it loses its value.  This increases current demand,
drastically decreases long term investments, and makes the
hyperinflation situation worse.

Hyperinflation, despite being talked about a lot, has actually occurred
relatively infrequently in recorded world history.  In each case, it has
happened during times of political instability, and was created by
unstable governments printing a very large quantity of money instead of
collecting taxes.  Typically in these situations, the government is either
unwilling or unable to collect taxes to prevent hyperinflation from
occurring.

The response to hyperinflation is that the currency is replaced by a new
currency.  Often, because of the unstable situation, the government is
also replaced.

The chances of hyperinflation occurring without a civil war or an
overthrow of the government contributing to the causes of hyperinflation
are remotely small in the industrialized world.


Is there a specific rate of inflation that defines hyperinflation?  I have not
seen a number that economists tend to agree with, but it would be very
high.  The number that I have seen quoted most often is an inflation rate
of 50% per month, or higher.  But I don't believe that the economics
profession has defined hyperinflation with a specific number.
Deflation



Deflation is defined as a period of time in which the price level decreases.  Alternatively, it can be
defined as a period of time in which the value of the currency rises.

During periods of deflation, businesses may have difficulty making payments on their investment
obligations.  They sell goods and services at deflated prices, but have to make principle and interest
payments based on pre-deflated values of the currency.

Real interest rates are higher than nominal interest rates.

As a result, businesses and farms are more likely to become bankrupt.
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