Reference no: EM132879060

During the first decade of the 2000s, the nation of Zimbabwe experienced one of history's most extreme examples of hyperinflation. In many ways, the story is common: Large government budget deficits led to the creation of large quantities of money and high rates of inflation. The hyperinflation ended in April 2009 when the Zimbabwe central bank stopped printing the Zimbabwe dollar and the nation started using foreign currencies such as the U.S. dollar and the South African rand as the medium of exchange. Estimates vary about how high inflation in Zimbabwe got, but the magnitude of the problem is well documented by the denomination of the notes being issued by the central bank. Before the hyperinflation started, the Zimbabwe dollar was worth a bit more than one U.S. dollar, so the denominations of the paper currency were similar to those one would find in the United States. A person might carry, for example, a 10-dollar note in his wallet. In January 2008, however, after years of high inflation, the Reserve Bank of Zimbabwe issued notes worth 10 million Zimbabwe dollars, which was then equivalent to about 4 U.S. dollars. But even that did not prove to be large enough. A year later, the central bank announced it would issue notes worth 10 trillion Zimbabwe dollars, then worth about 3 U.S. dollars. As prices rose and the central bank printed ever-larger denominations of money, the older, smaller-denomination currency lost value and became almost worthless.

Question 1. Highlight the common pattens that hyperinflations have in Zimbabwe

Question 2. What was the central bank´s solution to hyperinflation?

Question 3. Why the value of the Zimbabwe dollar changed over time?

Question 4. What has happened to the exchange-rate value of the dollar in each case?

a. The spot rate goes from $1.25/SFr to $1.30/SFr.

b. The spot rate goes from SFr 0.80/$ to SFr 0.77/$.

c. The spot rate goes from $0.010/yen to $0.009/yen.

d. The spot rate goes from 100 yen/$ to 111 yen/$.