Essays on Assessment Item 1 - Part B: Case Study Assignment

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I Introduction II DefinitionsIII AnalysisThe money growth rate and the inflation rate in Zimbabwe since 2000. Features of the Zimbabwe’s economy that provides a view of the cost of hyperinflationPolicy changes would address Zimbabwe’s inflation problemFiscal and Monetary Policy in the AD-AS Framework (Short run)Fiscal and Monetary Policy in the AD-AS Framework (Long Run)Deleting ten zeros off all prices stop Zimbabwe’s inflation Reference List INTRODUCTION Zimbabwe inflation is perhaps the most current hyperinflation occurrence in the world in the last several decades. The hyperinflation had gripped the whole country and created apprehensions among the people and Zimbabwean resorted to barter trade.

The inflation had its origin in excessive supply of money following the government’s actions in printing money in order to pay debts. The government could not cope with the financial burden of foreign debts because of which the nation had become almost bankrupt. It leads to excessive devaluation in currency and steep rise of private debts. DefinitionsHyperinflation – this is a runaway inflation during which prices rise at phenomenal rates. The value money declines daily; people lose confidence in the currency; and monetary system begins to disintegrate.

People revert to barter as a medium of exchange because money, which is rapidly falling in value, is unacceptable as a method of payments. Eventually the currency ceases to function as money, to be scraped. Economic growth – economic growth consist of progressive enlargement of the proportion of tertiary. Velocity of circulation- This is the average number of times a given quantity of money changes hands. Interest rates- the rate of interest on a new loan is referred to as the nominal interest rate. This is the rate of interest expressed in money terms and is known as the money rate of interest.

The nominal interest rate has two components. One is the expected rate of inflation, and the other is the real interest rate. It is argued that lenders wish to be compensated for future inflation, and that the real interest rate is a reward for postponing consumption to a future date. Inflation-the efficiency with which money performs its functions is greatly dependent upon the stability of its purchasing power. Inflation, especially unanticipated inflation, adversely affects the functions of money by undermining wealth –holders` confidence in its ability to be used as a medium of exchange and a store of value.

In its medium- of-exchange role, money provides wealth-holders with a convenience yield in the sense of saving time and effort in undertaking transactions. This yield will fall in a period of inflation because a progressively larger amount of money of will be needed to pay for the same quantity of goods and services. Money-holders will, therefore, suffer a loss of purchasing power.

The store- of- value function is equally threatened by inflation. As the real value of money falls, wealth-holders are induced to switch to real sure on the prices of real assets and so make inflationary conditions worse. AnalysisThe money growth rate and the inflation rate in Zimbabwe since 2000.

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