The rampant hyperinflation in post-World War I Germany was caused by: ? speculators bidding all the prices up. ? the government printing new money at a rate that was faster than their rate of production. ? a booming economy that created excessive "demand-pull" inflation. ? the allied forces trying to ruin the German economy.
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After the reunification of Germany in $1990,$ payments to rebuild the East led to a major expansion of aggregate demand in Germany. The German central bank responded by slowing money growth and raising German real interest rates. Trace through why this German monetary tightening would be expected to lead to a depreciation of the dollar. Explain why such a depreciation would stimulate economic activity in the United States. Also explain why European countries that had pegged their currencies to the German mark would find themselves plunged into recessions as German interest rates rose and pulled other European rates up with them.
In $1961,$ Germany faced the dilemma of an external surplus and a booming economy. As a result, speculative capital flowed into Germany and the Germans felt obliged to revalue their currency (rather than to devalue it). Can you describe how such a "revaluation crisis" or "inflow attack" might operate when the government (like Germany's at the time) is highly fearful of inflation? The reasoning is different from that underlying the devaluation crisis discussed in Chapter $18,$ because interest rates are pushed down by speculators and there is no danger of running out of foreign reserves.
Prashant B.
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