In Zimbabwe the growth rate of the quantity of money increased from 52 percent a year to 66,700 percent a year in 2007. Accordingly the inflation rate in Zimbabwe skyrocketed, from 56 percent a year in 2000 to 24,000 percent a year in 2007. The growth rate of real GDP between these years is harder to measure but was probably -30 percent per year.
a. How do we know that Zimbabwe’s reported inflation between 2003 and 2007 is almost certainly below the true inflation rate?
b. What must be done to stop Zimbabwe’s inflation?
c. Zimbabwe’s government frequently responded to its inflation by changing its currency to “knock off” zeros on the currency. At one point it was proposed to knock off ten zeros from the currency (so that an old 10,000,000,000 denomination bill would become a new 1 domination bill). Why will knocking ten zeroes off all prices not stop Zimbabwe’s inflation?