Question

F. Use the equation to explain or illustrate the difference between regular inflation and hyper-inflation.

Answer 1

The notion that the amount of money in circulation determines the price level is called the quantity theory of money. A more sophisticated approach replaced the notion that the price level is simply proportional to the amount of money in circulation.

The equation of exchange is: M*V = P*T

Where, M- Amount of money in circulation.

V- Velocity of money( the number of times per year that on average a unit of money enters into transactions).

P- The price level.

T- The level of transaction.

Difference between hyperinflation and regular inflation:-

A) Hyperinflation:-

a) Hyperinflation is phase of rising price of goods and service is more than 50% per month.

b) Hyperinflation causes consumers and businesses to need more money to buy products due to higher prices.

c) Hyperinflation is measured in terms of exponential daily increases that can approach 5 to 10% a day.

d) The increase in money supply is not supported by economic growth as measured by gross domestic growth the result can lead to hyperinflation.

B) Regular inflation:-

a) Regular inflation phase of rising prices l of goods and service is less than 50% per month.

b) Regular inflation doesn't increase the price of the products which can be bought easily by busineses and consumers.

c) Regular inflation cause higher deposit of money in banks due to the low price of products.