Effects Of Hyperinflation

Hyperinflation is a situation where inflation is out of control and is growing extremely rapid, which happens when monthly inflation exceeds 50 percent for more than 30 days. It often occurs when there is a significant increase of money supply, but is not supported by the gross domestic product (GDP) growth. Hence, it leads to an imbalance in the supply and demand for money and changes to aggregate price levels. Hyperinflation is considered to be a macroeconomic event that leads to a lower value of a country’s currency which leads to a loss of confidence from its citizens. Even if hyperinflation is considered an atypical event, it occurred as many as 55 times in the 20th century in countries such as China, Germany, Venezuela, Zimbabwe, and

It is a country with a rapid growth of inflation rate since 1989. However, it was until 2012 that its inflation rate began to continuously grow. According to the International Monetary Fund (IMF), Venezuela annual inflation rate in 2012 was 21.07%, then by the end of 2013 it when up to 40.639%, and until 2014 it hit 62.169% (Indexmundi, 2015). Moreover, in 2015 its annual inflation rate was 172%, then it skyrocketed up to 720% by the end of 2016% (Economics, n.d.). The IMF also forecasted the inflation rate for Venezuela to hit 1,600% by the end of 2017 (Talley, 2016). In addition to the nation inflation rates, there are multiple reasons that led Venezuela to its current crisis. The minor reason that has led to the collapsed of Venezuela’s economic is due to the dropped of oil price. Moreover, the inflation rate has skyrocketed mainly due to the instability of the country’s exchange rate as there are multiple exchange rates exist in the country and also the government misconduct its monetary policy.

Oil industry is the industry that requires a large amount of fixed investment, so if the price of oil falls, the producers may not be able to generate enough revenue to cover all of their expenses. The oil industry plays a huge role in Venezuela’s economic, it accounts for 95% of the country exports and composes 25% of its overall economy. Hence, Venezuela’s

The total collapse in the confidence of government is one of the partial cause that leads to hyperinflation. It is mainly due to the fact that when the people start to lose confidence on the government as well as its currency, more people are willing to exchange bolivars for dollars, raising more pressure causes the nation to run out of foreign exchange reserves (Weisbrot, 2013). Additionally, the downfall in confidence causes the government to issue more and more fiat money – the currency that a government has declared to be the official medium of payment that is recognized by the law but it is not backed by a physical commodity (Investopedia, n.d.). As a result, the currency that flow through the market has very little to no value at all. Until December 2016, Nicolas Maduro, the president of Venezuela conducted a new monetary policy that did not seem to improve the country’s situation. Instead of preventing the exchange rate of the Venezuelan bolivar from going up, Maduro announced to the public to have all the 100 bolivar bills, which is worth about 2.8 American cents to be removed from the circulation of currency (Schipani, 2016). After the 100 bolivar bills were taken down from the market, the government issued new larger denomination banknotes in January 2017. The new notes range from 500 to 20,000 bolivars; it aims to make transactions easier for Venezuelans. However, the largest