Question

The three stages of hyper-inflation are sometimes called (1) the “output-stimulus” phase, (2) the “quantity-theory” phase, and (3) the “flight to real goods”phase. Discuss what is going on during each of these stages, and relate to the terms of the equation of exchange.

Answer 1

The three stages of hyper-inflation are sometimes called (1) the “output-stimulus” phase, (2) the “quantity-theory” phase, and (3) the “flight to real goods “phase.

1) Output stimulus stage: Change in money stock is greater than change in prices

2) Quantity-Theory Stage: change of money stock equals change in prices (growth rate of output returns to normal... Growth rate of velocity rises so the 2 are approximately equal).

3) Flight to real goods stage: Change (increase) in money stock is less than change (increase) in prices (Fear of continuing inflation causes further rise in velocity).

Higher nominal int rate >

Higher velocity >

Higher inflation >

Higher inflationary expectation >

Cycle continues...