Our discussion on these topics have been limited to understanding the genreal concepts which we will master before moving on to applying them to the aggregate model.
Unemployment concerns people who do not have a job and are actively looking for work. The types include frictional, seasonal, cyclical and structural. The economic norm the US targets is about 4-5% yearly inflation. With current economic climates, this number might not be attainable but it is still the standard. Currently the US hovers around 9-10%.
Inflation types include demand-pull, cost-push and hyperinflation due to political error. However it occurs, it is a result of a rapid increase in the money supply that may not generate new growth in the economy.
Can you list any examples in history of hyperinflation ruining an economy due to a government printing more money for deficit spending? Especially ones not mention in class.
After World War II, in an effort to recover from the war costs, the Hungarian government had to print extra money, leading them into the worst hyper-inflated economy in the world. From August 1945 to July 1946, prices rose at 19 percent a day. In July 1946, prices more than tripled every day.
ReplyDeleteso, does changing the currency to a new one help with inflation? and if it does, how? I'm asking because i know venezuela changed from the Bolivar to the Bolivar Fuerte and i'm wondering if it's because of inflation
ReplyDeleteUsually inflationary pressure will cause the government to switch currencies when the inflation is out of control with no monetary ways of bringing it back down. The USA has never had to do this, but it seems to be a frequent action in South American countries. Assuming the change is not for counterfiting purposes (i.e. - just collecting the old bills and turing out new bills), it will cause a little price fluctuation until the new currency settles in. Typically this is a short term fix and the underlying cause of the inflation will creep back out cause another run on currency.
ReplyDeleteI will look into Venezuela's currency issues for you and have an opinion.
ReplyDeleteHere is an excerpt from a news article summing up the currency issue. This is an attempt by Chavez at taking advantage of energy prices in the short term but will need further "adjustments" in the future.
ReplyDelete"The move cuts Mr. Chavez's two-year-old "strong bolivar" currency by half – to 4.3 per dollar from 2.15 per dollar – for most imports and transactions. The central bank will also subsidize a stronger 2.6-per-dollar rate for imports of food, medicine and other essential items, Mr. Chavez said.
The move reflects the increasingly difficult economic and political trade-offs faced by Mr. Chavez, who has been in power for more than a decade and veered the country's economy sharply to the left through steps like nationalization of key industries, rampant government spending, and currency and price controls.
While those unorthodox policies can work for a few years, they usually set the stage for deeper problems down the road – troubles which have started to surface and which led to the currency devaluation. The move is also a humiliating turn for a currency renamed the "strong bolivar" two years ago, when Mr. Chavez chopped three zeros off the old currency and declared the beginning of an era of monetary fortitude.
The staunchly anti-U.S. leader is gambling that the benefits of a weaker currency will offset faster inflation, which threatens the purchasing power of his mostly poor backers. Finance Minister Ali Rodriguez said devaluation, which makes the price of imported goods more expensive in local currency terms, may add 5 percentage points to the 27% inflation rate – already among the fastest in the world."
oh ok. that makes sense. thanks a lot!!
ReplyDelete