Question

Explain why governments choose to pay for spending by printing money and how this relates to hyperinflation

Answer 1

Hyperinflation happens when goods and services costs increase by more than 50 per cent a month. A loaf of bread could cost one in the morning and a higher one in the afternoon, at that pace. Increases in cost frequency separate it from other forms of inflation. The next worst inflation, galloping, just sends prices up 10 percent or more a year.

There are two major reasons for hyperinflation: an rise in money supply and demand-pull inflation. The former happens when the government of a country starts printing money to pay for its expenditures. As the money supply rises, prices rise as in daily inflation. The other factor, demand-pull inflation, happens when the supply outstrips a increase in demand, bringing higher prices. This may be attributed to higher consumer spending owing to a increasing boom, a sudden rise in exports, or further government spending.

Hyperinflation has two key causes: an increase in the supply of currency, and inflation in demand. The former happens when the government of a nation begins printing money to pay for its expenses. As the money supply rises, prices rise as in daily inflation. The other factor, demand-pull inflation, occurs when a demand surge outstrips supply, bringing higher prices. This may be attributed to increased consumer spending as a result of a increasing boom, a rapid rise in exports or further government spending.

The two go hand in hand, mostly. The government may continue to print more money, rather than tightening the money supply to avoid inflation. Prices are skyrocketing, with so much money sloshing around. When customers know what's going on they expect inflation to continue. They buy more now to stop charging a subsequent higher price. The excessive demand increases inflation. If they hoard supplies and create shortages it is even worse.

More money printing does not increase economic production – it just increases the amount of cash that circulates in the economy. If more money is printed, customers can demand more goods, but if businesses still have the same amount of products, they will respond by pricing up. Printing money in a simplistic model would only trigger inflation.

If governments were to print money to pay off their national debt, inflation could increase. The inflationary rise would lower the value of bonds. If inflation gets higher, people will not want to hold bonds because their value drops. So it will be difficult for the government to sell bonds to finance the national debt. To draw creditors, they'll need to pay higher interest rates. When too much money and inflation get out of hand from the government printing, investors won't trust the government and borrowing anything would be hard for the government at all. Printing money will therefore generate more problems than it can solve.