Cause And Effect Of Hyperinflation

Introduction

In the following empirical note we will be looking at what inflation and deflation is, describing the causes of both and how they can happen with the help of diagrams. We will be talking about how inflation and deflation has affected Europe since 1999, what were the main reasons of recessions, recovering from it and what is happening in the world at present that could cause deflation in near future.

Inflation means the rise in prices of goods and services. Hyperinflation happens when there is an extreme increase in prices over a long period of time. Inflation in the Euro Zone is measured by HICP (Harmonised Index of Consumer Prices) and CPI (Consumer Price index).HCIP was created by ECB (European Central Bank) which is the main

Also if there`s a decrease in supply or the expense to process these products increases, therefore putting pressure on the price of the goods. When supply decreases the demand doesn’t decrease that easily and companies have to increase their prices to make up for the profit lost. Below is a diagram showing what happens during cost push inflation when supply and prices increase.

As seen from the diagram the supply curve (S0) met the demand curve at point Z, the equilibrium. Then supply increased and prices increased with it at point Y, the new equilibrium. However the demand stayed the same and there were no substitute goods to replace with, which caused the start of inflation.

Deflation happens when overall price level decreases the rate of inflation becomes negative. This happens due to reduced money supply or credit availability. There are many reasons why deflation could

The structure of the capital may change and companies have easier access to debt or equity markets, therefore using the money to improve productivity or invest in new business. Companies can choose to reduce interest rates, change policies of the bank or switch to different investors to raise capital. When they will have used up all their capital to increase productivity they will have to reduce prices to show the great supply of products which could bring them to deflation.

Decreasing currency supply will lead to decreasing prices so that consumers can afford to buy goods and services. Currency supply can decrease because of the actions of Central Bank Systems, when economy`s spending are taken as credit and when customers are given a loan they tend to save more and spend less which as a result lead to companies reducing prices to increase demand.

Stabilizing economy with deflation: When deflation has hit the economy, it is very hard to control the economy and bring it back to normal stage before deflation. When consumer demand decreases, savings increase, the company’s profits as a result decrease, as well as employee wages and their own purchases. Therefore, the same thing happens to other businesses that are connected to these companies, and the circuit keeps affecting everyone which is very hard to