1.Explain in words how hyper-inflation takes off. What role does fiscal policy play in causing hyper-inflation?
- Why is it important that a central bank be independent from the fiscal authorities (the government)?
- Explain how an increase in inflation expectations is self-fulfilling and self-perpetuating and can lead to explosive inflation or hyper-inflation.
- Consider a standard IS curve which is downward sloping in (Y, r) space. Explain why any point underneath this IS curve is a point in which S < I.
Sample Solution