ECON 102 Lecture Notes - Lecture 17: Nominal Interest Rate, Real Interest Rate, Seigniorage
Document Summary
Some countries use money creation to pay for spending instead of using tax revenue. Def: inflation tax the revenue the government raises by creating money. The inflation taxes everyone who holds money. Almost all hyperinflation follows the same pattern. The government has a high level of spending and inadequate tax revenue to pay for its spending. The government"s ability to borrow funds becomes limited. As a result, it turns to printing money to pay for its spending. The large increases in the money supply lead to large amounts of inflation. This creates the hyperinflation which ends when the government cuts its spending and eliminates the need to print more money. At the beginning of the 2000s, zimbabwe dollars were worth more the u. s. dollars. At the end of 2009, 10 trillion zimbabwe dollars. As prices rise, so does incomes thus inflation does not in itself reduce the purchasing power of income.
