Question

'A state of running or hyperinflation in any economy is very harmful for production'. Justify the statement with two reasons.

Answer 1

When the overall price level of the commodity basket rises extremely quickly, it is referred to as hyperinflation in an economy. In an economy, an inflationary or hyperinflationary state is extremely harmful to production due to:

1. Reduction in saving: A hyperinflationary environment is bad for savings. A sharp price increase means that more money is needed to purchase the same products and services as previously. As a result, savings and investing have decreased.
2. Misallocation of resources: The price mechanism's ability to function smoothly is disrupted by hyperinflation. It causes output to be maladjusted, which forces producers to shift their focus from producing necessities to non-essentials in the hopes of making more money.