Question

In Bolivia, the inflation rate was 25,000% a year in 1985, meaning that if you waited until after work to do your grocery shopping, you would only be able to buy a small fraction of what you could have bought if you had gone shopping in the morning. Similarly, if you were paid in the morning but waited until after work to use this money, you would lose a majority of the

purchasing power of your income. Married couples in Bolivia reacted to these conditions by

having one of the spouses quit their job and instead devote themselves full time to managing their money. In Bolivia, are transactions costs negligible? Does money growth have real effects in this case? If so, how (i.e. in which direction) does money affect real variables?

Answer 1

a) Transaction costs in Bolivia during hyperinflation is not negligible. As the value of currency / purchasing power decreases drastically with in a matter of few hours and people are forced to leave their job just to manage money, Transaction cost is high and certainly not negligible.

b) Yes. Money growth does have real effect in this case. Hyperinflation makes the currency volatile. Its value (purchasing power) reduces very quickly. That's why people were unwilling to save this currency. Simply because the saved money will be almost worth nothing after few time. As a result private saving reduced drastically. It led to decrease in Investment. Thus growth of money led to reduction in growth rate and real GDP.