Question

Why do leaders of less developed countries often run very large deficits and print entirely too much money creating excessive inflation, even though they are aware of the consequences of their policies? How might these inflationary policies damage these countries chances for growth and development?

Answer 1

In order to become rich, some countries print more money after manufacturing and selling more and more commodities and providing even more services. This will rise up the prices of these commodities and services and thus can print more money. Otherwise commodities with more value should be sold.

But, if poor countries or under-developed countries print more money without enough production and sale, prices will shoot fast and use of that money by the citizens of that country will steadily reduce. At that time, those countries have to either swap their goods for another needed commodities or need to pay dollars in place of their own currency. This will happen in case of hyper inflation caused by the over printing of money.

If the country lower the price of necessaries atleast, then only the price of commodities will become affordable. This helps to reduce hyperinflation. But, this price reduction may even make stock-out of these commodities. Hence, the fact is that an under-developed country will never become rich if they simply print more money. This will make shortage in money in banks, business organizations et cetera. Hence, without much production of commodities, printing more money will be harmful to the economy as it increase the prices.

Whenever the prices of commodities in such countries rise, it will affect the entire economy which results in inflation. When prices rise suddenly, aggregate demand for the products will also rise. But, at the same time, aggregate supply will decline. Here, money will grow faster than the economy. Economy will suffer due to high inflation in under-developed countries. This can be controlled by compatible structural elements of national expenditure.