Question

1. What is the relationship between hyperinflation and the real tax revenue?
2. How governments create hyperinflation?
3. How can a government overcome hyperinflation?
4. What cause hyperinflation in Germany in after the World War I? How Germany overcame the hyperinflation 1922-1923?
5. What were the causes of hyperinflation in Zimbabwe in 2008?

Answer 1

Hyperinflation occurs in an economy when there is an excessive price increase and the price increase is out of control in the economy.Hyperinflation occurs in the economy when the government releases more fiat currencies.Fiat currencies does not a have a measure of value. Whenever there is an increase in the hyperinflation the tax revenue declines drastically.When the tax revenue declines the government will reduce the public services.Hyperinflation will reduce the tax revenue ,creates more unemployment in the economy.
The government creates hyperinflation by releasing more fiat currencies.Demand pull inflation is also a reason for hyperinflation.To maintain hyperinflation in the economy the government should reduce the money supply in the economy.The growth in currencies should match with the growth in the production.The existing valueless currencies should be replaced with the valuable currencies.The government should create a stable currencies and the shortages in the production of goods should be looked upon.

Hyperinflation crisis hit Germany during 1923.After the first war the Germany was already facing high inflation rates and increasing instability.In addition to these high inflation rates the workers of Germany went on a strike and they started producing fewer industrial goods which made situations more worse in Germany.Thus inorder to satisfy the workers and to prevent them from strike the government simply started printing more currencies which paved the way for hyperinflation in Germany.Various steps were taken by the Reichsbank,the central bank of Germany to reduce hyperinflation.The central bank stopped monetizing the debt and Rentenmark a new mode of exchange was introduced on Germany to overcome hyperinflation .
In 2008,Zimbawe faced the second highest inflation in record.There were various reasons for this hyperinflation crisis.The government of Zimbabwe started printing more currencies due to high national debts,reduced export earnings which worsened balance of payment position of Zimbawe,lack of confidence among investors lead to shortage of investments .The economy also faced a huge decline in the output.The land reforms introduced by the Zimbawe government in 1990s were also one of the reasons for the hyperinflation crisis in zimbawe.