Which of the following is phenomenon that leads to Hyperinflation?
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- It is a situation when aggregate demand in an economy outpaces aggregate supply
- It is a situation of persistent rise in inflation along with dip in growth and increase in unemployment
- It is a situation caused by an increase in prices of inputs like labour, raw material etc
- It is a situation when a nation experiences very high and accelerating inflation
Correct Answer: It is a situation when a nation experiences very high and accelerating inflation
Answer Explanation
An extreme economic phenomenon, hyperinflation is characterized by a rapid increase in the price of goods and services that is uncontrollable. According to option (d), hyperinflation occurs when a nation experiences very high and accelerating inflation. We will examine the factors that contribute to hyperinflation in more detail.
A hyperinflation is an extremely high and rapidly accelerating inflation rate in a nation. Hyperinflation is an exceptional state of economic turmoil. It is often associated with a breakdown of the usual mechanisms of economic control and price stability.
Hyperinflation is typically defined as monthly inflation rates exceeding 50% or annual inflation rates exceeding several hundred or even thousands of percent. In most cases, hyperinflation is triggered by a combination of complex factors, such as:
Excessive Money Supply Growth:
One of the primary causes of hyperinflation is an unchecked expansion of the money supply. Printed new currency by a central bank to finance government deficits or meet other obligations floods the economy. As too much money chases too few goods and services, this excess liquidity can quickly lead to skyrocketing prices.
Confidence Loss:
Hyperinflation usually occurs when a nation’s currency is not perceived to be stable. Businesses and citizens may fear their money will rapidly lose value, so they spend money as quickly as possible. This surge in demand further exacerbates inflation.
Supply Constraints:
Hyperinflation can also occur when supply chains are disrupted by wars, natural disasters, or political instability. These events will cause shortages of goods, increasing prices.
Why the other options are not correct
a. It is a situation when aggregate demand in an economy outpaces aggregate supply
When aggregate demand exceeds aggregate supply in an economy, it is termed hyperinflation. It is important to note that an imbalance between aggregate demand and aggregate supply can contribute to inflation, but does not inherently trigger hyperinflation. Extremely high and accelerating inflation rates are characteristic of hyperinflation, which is far more severe than normal supply-demand imbalances.
b. It is a situation of persistent rise in inflation along with dip in growth and increase in unemployment
The concept of stagflation, which describes a combination of stagnant economic growth, high inflation, and high unemployment, consists of persistent increases in inflation along with a dip in growth and an increase in unemployment. Unlike hyperinflation, stagflation does not necessarily escalate to such extreme levels of rapid and uncontrollable inflation as hyperinflation.
c. It is a situation caused by an increase in prices of inputs like labour, raw material etc
Input prices, including labor and raw materials, can increase, causing cost-push inflation. However, a rise in input prices, including labor and raw materials, can cause inflation. However, this factor alone is not sufficient to lead to hyperinflation. Hyperinflation involves broader systemic factors that go beyond specific cost increases.
Conclusion
Hyperinflation is an extreme and rare economic phenomenon that involves a nation experiencing extremely high and rapidly accelerating inflation rates. Several factors typically contribute to its onset, including excessive growth of the money supply, loss of confidence in the currency, and severe supply disruptions.
Hyperinflation stands out as a unique and catastrophic event that profoundly disrupts an economy’s stability and well-being. Other types of inflation can result from a variety of economic dynamics.
Which of the following can be undertaken to control inflation?
I am Bibisha Shiwakoti a final year BBS student from Janapremi College. I have completed my higher secondary education at Kalinchowk Secondary School.
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