Hyperinflation in ZimbabweWatch
Zimbabwe experience hyperinflation in 2007 & 2008. Price of goods in Zimbabwe rose to trillions and quadrillions of Zimbabwe dollars. For example, within six months, the price of a loaf of bread increased from Z$200000 to Z$1.6 trillion. How would those workers and foreign investors might react to this hyperinflation? How would it affect the current account of Zimbabwe? What should the government do in order to improve the situation? (Please help. Thanks)
Investors will panic as the country does not seem stable and prices are sky rocketing and investors look for stability when making investments not things that will go up and down like crazy and not follow the trend.
The current account of the balance of payments will be negatively affected, one reason will be because FDI and other forms of investment will decrease due to lack of stability mentioned above and the BoP may have a deficit (to evaluate this does however depend on what the country's financial account is like, the period of time for the hyperinflation, other factors etc..)
The government could take any measure of reducing AD from shifting very rapidly to the right on the AS/AD curve. Therefore they could tax corporations more which will reduce investment and slow down the AD? Reduce government expenditure? Increase income tax?
Hope this helped, please correct me if I'm wrong on anything - it's quite late and I'm very tired🙈
If a free market is allowed, the price and quantity of the goods will be decided by the supply and demand curve. This will allow those producers to raise the price of goods in order to gain more profit. Wouldn't this worsen the economy of the country which is having a hyperinflation? Shouldn't the government set a maximum price to certain goods so that the price is controlled, thus the producers can't increase the price as they wish, so consumers will have less burden in buying those goods. In this case, the inflation is controlled. Is this correct?