Category: Economics: Ch 20
Hyperinflation in Zimbabwe is no longer news. Indeed the news below that inflation has risen to 2,200% may not even surprise us any more. However, inflation of this level should also mean similar changes in the exchange rate if purchasing power parity is to be maintained. The official exchange rate in Zimbabwe, however, hasn’t changed by anywhere near this amount and there are reports (See Scotsman article below) that the Governor of the Central Bank has even tried to portray a recent devaluation as not really a devaluation at all!
Our mutual friend The Economist (subscription) (12/4/07)
Zimbabwe inflation reaches 2,200% BBC News Online (26/4/07)
Zimbabwe’s inflation rate surges to 231,000,000% Guardian (9/10/08)
A month ago, the hospitals were overflowing. Now they lie empty Guardian (6/12/08)
Hyperinflation in Zimbabwe Wikipedia
(27/4/07)
How Zimbabwe lost control of inflation Newzimbabwe.com (11/12/09)
Questions
| 1. |
Explain, using diagrams as appropriate, how hyperinflation will affect the exchange rate in Zimbabwe. |
| 2. |
Discuss the likely economic impact of not devaluing the official exchange rate in line with the level of inflation in Zimbabwe. |
| 3. |
Assess possible exchange rate policies that would help reduce the level of hyperinflation in Zimbabwe. |
Since the 1970s and 1980s we have moved away from an active exchange rate policy as part of an overall demand management strategy. Indeed, by the mid 2000s, even the role of fiscal policy in demand management had diminished. The article below looks at these changes and considers whether this new approach to demand management is proving effective.
It’s a fashionable club but can the MPC keep us out of the rough? Guardian (11/2/07)
Questions
| 1. |
Explain how the approach to management of the economy has changed over the last three decades. |
| 2. |
Assess the problems that might arise from trying to manage the economy using just one policy instrument (i.e. interest rates).. |
| 3. |
Explain what is meant by an exchange rate policy. Discuss whether the reintroduction of an exchange rate policy would help with the management of the economy. |
As part of its Target 2.0 competition for students, The Times published a series of briefings looking at the factors that cause inflation. The one linked below considers the role of labour markets in determining inflation.
Interplay of work and inflation rate Times Online (2/2/07)
Questions
| 1. |
Explain the key determinants of the equilibrium level of wages in the labour market. |
| 2. |
Assess the role of equilibrium labour market wages in the determination of the level of inflation. |
| 3. |
Discuss the extent to which the NAIRU is still a relevant theory when considering the determinants of inflation. |