Question

Over 2018 the cumulative inflation in Venezuela reached 80,000%. How is such phenomenon called? What can cause inflation to reach such value? Explain your answer using the quantity theory of money. Give examples.

Answer 1

Such phenomena is known as hyper inflation as there is unprecedented hike in the price of good due to crisis in the economy. From the quantity theory of money it is due to the supply of money. The theory says that doubling the money supply will double the price level. In Venezuela the crisis started in 2013 as the economy is dependent on the import of oil. Since there was a drop in global oil prices it causes depreciation of Venezuela currency and reduction in the demand for its oil. Today Live with dinosaur government started printing lots of money which reduces its currency value against goods in the domestic market to fall. Currency lost its value due to economic and political factor.

Equation of quantity theory of money

MV = PY

P is price level, Y is GDP or income,. M is money supply, V is velocity of money.

When M increases keeping V and Y constant price will increased by same amount. If Y also decrease then with printing new notes ( more M) to equal the equation price will shoot up.

Such a phenomena is seen during the crisis period and and termed as hyper inflation. In such case situation is more aggravating and panic when people substitute money for goods as they have greater risk of losing real value of money more and more.