Answer to Question #262129 in Macroeconomics for Izzy

Question

You are the economic adviser to a country experiencing hyperinflation. Politicians debating the proper course of stabilization have advocated various positions, listed in statements (a) through (e). Discuss each statement in turn.

a) ‘This crisis will not end until workers begin to pay their fair share of taxes.

b) ‘The central bank has demonstrated that it cannot responsibly wield its power to create money, so we have no choice but to adopt a currency board.’

c) ‘Price controls are necessary to end this madness.’

d) ‘Stabilisation will be successful only if there is a large recession and if there is a substantial increase in unemployment.’

e) ‘Let’s not blame the central bank. The problem is fiscal policy, not monetary policy.’ 

Answer 1

Part a) Politicians debating that this crisis will not end until workers begin to pay their fair share of taxes is somewhat correct because when the workers do not pay their fair share of taxes, income available to them for the purpose of dispersal increases. As the disposable income increases workers tend to demand more of the goods and services available in the economy. Thus the government of the country in order to contain the hyperinflation in the economy can formulate ways to regulate the tax paid by the workers in the economy.

Part b) The central bank is the central authority that is responsible for limiting or expanding the money supply in the economy. Since the country is in economic turmoil as the measure expected from the bank, turned out to be insufficient to contain inflation which later converted into hyperinflation. But constituting a currency board is not a solution to the problem as the currency board in itself will not be able to manage the situation of hyperinflation without taking the help of a central bank.

part c) The government does need to impose price control measures so the prices of the goods and services in the market could be brought to the level to some extent. The reason being once the government brings in price control measures, goods and services will be made easily available to the entire population thus the impact of hyperinflation will not be felt.

Part d.stabilization expresses maintaining the monetary, taxation and revenues policies without a negative effect to the market economy and its operations. In such situation all the macro-economic indicators would be in a harmony with each other.

Part e.Fiscal policy is an estimate of taxation and government spending that impacts the economy. It leads to the government lowering taxes and spending more, or one of the two. The aim is to stimulate the economy and ensure consumers' purchasing power does not weaken.