Read the following article from the Economist magazine print edition from April
ID: 1105873 • Letter: R
Question
Read the following article from the Economist magazine print edition from April 27, 2013. Answer the questions that follow Zimbabwe after hyperinflation; In dollars they trust Grubby greenbacks, dear credit, full shops and empty factories Apr 27th 2013 | HARARE From the print edition e 250000000 000000 RESERVE BANK OF ZIMBABWE FIFTY MIL TWO HUNDRED AND Small change, 110370 250000000 BEARER CHEQUE old and new REUTERS THE OK Mart store in Braeside, a suburb of Harare, is doing a brisk business on a sunny Saturday morning. The store, owned by OK Zimbabwe, a retail chain, is the country's largest. It stocks as wide a range of groceries and household goods as any large supermarket in America or Europe. Most are imports. For those who find the branded goods a little pricey, OK Zimbabwe offers its own-label Top Notch range of electrical goods made in China. The industrial district farther south of the city centre looks rather less prosperous. Food manufacturers and textile firms have down-at-heel outposts here. Half a dozen oilseed silos lie empty. Only a few local manufacturers are still spry enough to get their products into OK storesExplanation / Answer
1) Inflation refers to the gradual increase in general price level which is supported by the output/growth. whereas, hyperinflation refers to sudden rise in inflation and which is not supported by the output/growth.
Rise in money supply leads to Inflation which is succeeded by the growth but hyperinflation arises due to excessive rise in money supply which creates unbalance between supply and depend which is succeded by the fall in output.
2) Three countries which had hyperinflation in recent years with inflation rate are:
i) Angola, 1999 having inflation rate 1,000,000,000,00% prior to pre 1990 period.
ii) Belarus, 2000 having inflation rate 2,000,00%.
iii) Madagascar, 2004 having inflation 500%.
3) After coming from phase of hyperinflation, wiped out all the value of money and bank had to start from zero revenue. Bank did not have any deposits to lead out. People were skeptical about making deposits because of two reasons first, they had already made big loss during hyperinflation period, second there were no leaders of last resort that is if something goes wrong then there was no one for backup. Due to these reasons, excess cash were invested abroad.
4) Due to scarcity of cash at banks because there were no leader of last resort to make them out of difficult situation if it arises, which made depositers skeptical. Also, banks has to maintain high reserve ratio which reduces their ability of lend. If dollar was not available then it could had been very difficult for zimbambe to come out of this hyperinfllation period. People had lost trust over their currency if other currency were available to them for making transaction then value of their currency won't increase as in this case, dollar reduces inflation.
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