Principles of Economics- Mankiw (5th) 651

Principles of Economics- Mankiw (5th) 651 - CHAPTER 29...

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CHAPTER 29 OPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTS 673 CASE STUDY THE NOMINAL EXCHANGE RATE DURING A HYPERINFLATION Macroeconomists can only rarely conduct controlled experiments. Most often, they must glean what they can from the natural experiments that history gives them. One natural experiment is hyperinflation—the high inflation that arises when a government turns to the printing press to pay for large amounts of gov- ernment spending. Because hyperinflations are so extreme, they illustrate some basic economic principles with clarity. Consider the German hyperinflation of the early 1920s. Figure 29-3 shows the German money supply, the German price level, and the nominal exchange rate (measured as U.S. cents per German mark) for that period. Notice that these series move closely together. When the supply of money starts growing quickly, the price level also takes off, and the German mark depreciates. When the money supply stabilizes, so does the price level and the exchange rate. The pattern shown in this figure appears during every hyperinflation. It
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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