Lecture 7 - EC 60: Lecture 20 April 21, 2009 International...

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EC 60: Lecture 20 April 21, 2009 International Financial Crises 1981-2009
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Announcements Third exam Thursday April 23 Final exam Friday May 1 3:30-5:30 Answer keys to previous exams Last minute practice problems
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Fighting Hyperinflation in Bolivia One case study April 1984-July 1985 The price level rose by 24,662 percent. The Bolivian government was printing  money to pay off its debt to American  banks.
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Bolivia used a fixed exchange rate  to stop the hyper-inflation overnight Inflation had become so severe that the  Bolivian economy has become  “dollarized.” Prices were quoted in dollars. Payment was made in pesos. The peso price was determined by the  peso-dollar exchange rate at the instant  the transaction occurred.
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August 1985 Peso pegged to U.S. dollar. The exchange rate stopped changing. So prices stopped changing … overnight. The money supply would only change if  currency traders wanted to hold pesos  instead of dollars.
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And, eventually they did. As the shoppers and investors came to  believe that the inflation had stopped, they  started holding pesos again.
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This note was uploaded on 04/29/2009 for the course ECONOMICS 60 taught by Professor D.brown during the Spring '09 term at Tufts.

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Lecture 7 - EC 60: Lecture 20 April 21, 2009 International...

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