Inflation refers to a situation in economy where there is a general and sustained increase in prices measured by various indices. This can show the performance of the economy, which can have a major impact on people’s lives.

There are three main types of inflation: cost-push inflation, demand-pull inflation, and monetary inflation. However, monetary inflation is the most complicated and sweeping. The example of Deutsche Mark can illustrate the impact of inflation on people’s everyday lives.

(image source: http://blogs.telegraph.co.uk/news/danielhannan/100065674/the-euro-isnt-finished-thats-precisely-the-problem/)

In 1923, because of the loss of the First World War, Germany’s coal productivity decreased so much that coal supply could not meet domestic consumption. As a result, the only option for Germany was to import large amounts of coal. For this, the German government required vast sums of money, but its money supply was lacking. For this reason, the government started increasing its money supply. According to Irving Fisher’s Quantity Theory of Money, MV=PT, if the rate of growth of money supply is greater than the increase in the level of output in the economy, prices increase. The government increased the rate of money supply by about 8.5 times, and therefore, within a month, the value of money decreased from 74,500 Marks to 1 U.S. dollar to 136,000 Marks to 1 U.S. dollar. Germans even burned paper money to produce heat instead of buying coal. Obviously, this monetary inflation had a huge impact on Germans.

Today, however, Zimbabwe is facing the same problem…

Wendy Lin