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What Is Hyperinflation?

Hyperinflation is a term used in economics to describe a situation wherein the rate of inflation goes out of control. Inflation is used to refer to the increase in the overall prices of goods and services in an economy over a period of time. Due to the increase in the prices, the purchasing power of a currency goes down; that is, people can buy less with the same amount of money.

Inflation is a natural event, and all economies experience it. However, when the rate of inflation is faster than it normally should be, hyperinflation occurs. There are no clear cut rules as to what the rate of inflation should be, though, so hyperinflation is considered to be a subjective concept. Economics experts are the ones who declare whether there is hyperinflation or not, and even then, not everyone agrees all the time. In general, when the inflation rates doubles - at least - within a few years, economists say that hyperinflation exists.

Hyperinflation occurs when there is a drastic drop in the value of a country’s currency. Most often, the response of the country is to print more money so that there will be more in circulation. However, this only results in the money being worth much less than it used to be. If this happens in a relatively short period of time, every sector in the economy will feel the financial repercussions of hyperinflation.

How do governments deal with hyperinflation? Economists will suggest various solutions depending on the specific situation, but some workarounds include increasing the interest rates, drawing up a new monetary policy, and setting a new - lower - base unit.

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