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Hyperinflation is an economic term describing rapid, uncontrolled price increases. During periods of hyperinflation, the real value of domestic currency erodes at a rapid rate. Prices increase as people who hold the currency seek to get rid of it as quickly as possible because they know that the cash will not purchase as many goods tomorrow as it does today.

Note that the real value of goods and services does not increase as rapidly as their nominal value. Still, the real value increases because of the increased demand brought about by increased consumption.

One cause of hyperinflation is when, during a depression, the money supply expands rapidly without a corresponding economic expansion, as reflected in an increase in the gross domestic product (GDP).  This creates a large supply of money with little demand for it. The currency then loses its value.

Hyperinflation is also caused by political instability and war. Currency loses value because people lose confidence in the government that backs it. Some people even switch to a more stable currency from another country. Sellers require a risk premium to be enticed to accept the currency.  The risk premium is reflected in higher prices.

A number of countries have experienced hyperinflation throughout their history, including Brazil, China, France, Greece, Poland, and Philippines, just to name a few.  In 1994, Brazil had an inflation rate over 2,000%.  One of the most famous periods of hyperinflation was in Germany during the early 1920’s, when hyperinflation reached a peak of almost 30,000%.

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