Question

Which of the following are consequences of hyperinflation? Check all that apply. People spend significant time and effort buying goods and services to avoid losing purchasing power. Investors make speculative rather than productive investments. People hold on to money as long as possible. People keep less of their money in the bank and more of it under their mattresses (that is, in cash).

Answer 1

Answer:

The consequences of hyperinflation are that people spend significant time and effort buying goods and services to avoid losing purchasing power, and that investors make speculative rather than productive investments.

Explanation:

Hyperinflation means extremely high inflation. There is no generally accepted definition of the term, but a rule of thumb is at least 50% inflation per month. Unlike inflation, hyperinflation is often associated with a general collapse of confidence in a country and its institutions.  

The general collapse of confidence creates financial turmoil which means that a country no longer has the opportunity to rely on loans to finance its commitments. As a result, the government needs to increase the money supply, that is, to create money, to meet its expenditure. The increased amount of money decreases the value of the currency and causes a price increase in nominal terms.

When hyperinflation has gone really far, it is difficult for the government to improve the situation by printing more money. People then move to foreign currencies, create new currencies or do barter.

Answer 2

Answer:

People spend significant time and effort buying goods and services to avoid losing purchasing power.

Investors make speculative rather than productive investments.

Explanation:

Hyperinflation refers very high and increasing inflation in which the purchasing power of money or domestic currency is lost so quickly that people avoid holding money by converting to goods, real estates or other foreign currencies as soon as they are available.

Speculative investment refers to investment in highly risky assets such stocks, fine art, real estate, currencies, and among others with the aim of profiting from price fluctuations when there are changes in values of the investments rather than holding them for a long time.

Productive investment refers to investment in plant and machinery to be used in factory for production of goods. This is not usually not attractive during hyperinflation because of very high cost of production can lead to a loss.

Therefore, people spend significant time and effort buying goods and services to avoid losing purchasing power. Also, investors make speculative rather than productive investments.