Gm545 Essay

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Paul Kevin Steurer Business Economics GM545 September 2012 Chapter 16, Question 6 Hyperinflation is when there is a very high and accelerating inflation. It can have a dramatic and devastating impact on the economy because when a country’s monetary system breaks down their currency loses its value rapidly, causing prices to rise in response. This usually happens when a country has more government spending than tax revenues in conjunction with printing more money to make up for the deficit. (Stone 436) One of the effects that have serious consequences is the reallocation of wealth from the general public to the government. People lose faith in the value of money and eventually end up bartering for goods. High inflation usually leads to low interest rates, which reduces the value of money. This negatively impacts consumer savings and improves benefits for debtors. In Germany after World War I, the country had so much debt from the war that financial assets in banks and pensions were taxed away and considered worthless. (Stone 436) One way to prevent hyperinflation is to restore confidence in the country’s budgetary system by balancing government budget. Prevention includes the implementation of a new monetary system (currency) for the country and an increase in the interest rate. This makes money harder to borrow and in turn increases its value. Lastly, implementing a system to accurately measure and track inflation can halt the growth of the money supply. Chapter 26, Question 8 A fixed exchange rate is one that is determined by the government and policy is adjusted to maintain this rate. Floating exchange rates are determined by the currency markets, which fluctuate with the economic conditions at the time. So, the biggest difference is one is regulated, one is not. A fixed rate is when the

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