Question

4) Consider an episode of hyperinflation, where leading economists worry about "persistence" in inflation. (a) Explain what hyperinflation is. (b) Explain why inflation may be persistent over time, or said to have inertia using models from class and intuition.

Answer 1

When associated with depressions, hyperinflation often occurs when there is a significant increase in the money supply not supported by gross domestic product (GDP) growth, resulting in an imbalance in the supply and demand for the money. Left unchecked, this causes prices to increase, as the currency loses its value. Hyper inflation means tremendous rise in price leve without underrgoing much rise in GDP.

Inflation inertia is when the prices keep rising because of past inflation, despite of the lack of structural reasons for that to happen.

Inflation always have some degree of inertia. But in normal, sane economies, it usually fades relatively quickly.
Every year, the inflation of the past year is used in union's negotiations to raise salaries. The higher salary then impacts the economy and causes some new inflation, that is going to feed the cycle for the next year.