Q-1 One hundred trillion dollarsthat's 100,000,000,000,000is the largest denomination of currency ever issued.1 The Zimbabwean government issued the Z$100 trillion bill in early 2009, among the last in a series of ever higher denominations distributed as inflation eroded purchasing power. When Zimbabwe attained independence in 1980, Z$2, Z$5, Z$10 and Z$20 denominations circulated, replaced three decades later by bills in the thousands and ultimately in the millions and trillions as the government sought to prop up a weakening economy amid spiralling inflation.

Shortly after the Z$100 trillion note began circulating, the Zimbabwean dollar was officially abandoned in favor of foreign currencies. From 2007 to 2008, the local legal tender lost more than 99.9 percent of its value (Hanke 2008). This marked a reversal of fortune from independence, when the value of one Zimbabwe dollar equalled US$1.54.

Zimbabwe's extreme and uncontrollable inflation made it the firstand so far onlycountry in the 21st century to experience a hyperinflationary episode. Hyperinflation devastates people and countries. Zimbabwe, once considered the breadbasket of Africa, was reduced to the continent's beggar within a few years; its citizens were pushed into poverty and often forced to emigrate. The country's experience shows how a relatively self-sustaining nation at independence fell victim to out-of-control inflation and the severe erosion of wealth. The causes of Zimbabwe's hyperinflation, its effects and how it was stopped are particularly instructive.

The chart below shows the consumer price inflation in Zimbabwe. In July 2008, the monthly inflation rate in Zimbabwe was 2600.2 percent.

Source: Federal Reserve Bank of Dallas (2011)

1. Why did Zimbabwe witness this extreme phase of inflation? (7 marks)
2. Whyexactly is high inflation a problem? (7 marks)
3. What measures were undertaken by the government of Zimbabwe to deal with hyperinflation? (6 marks)

QUESTION 2 (15 Marks)

The strong recovery in US domestic demand has spilled over to the rest of the global economy. The largest economy in the world is sucking in goods from the rest of the world at a record rate, either to restock inventories or for final consumption. The US trade deficit in goods was over $93 billion in June; its overall trade deficit was lower because the US has a surplus in services trade. India has been one of the beneficiaries of rising demand from countries such as the US. Indian goods exports have had a splendid run in recent months.

Source: Livemint (2021)

1. Use the AD-AS model to examine the short-run effect of this event on the Indian economy. What is the short-run effect on GDP, price level and unemployment? Assume that initially the Indian economy is in a long-run equilibrium. (8 marks)
2. Explain how the economy may correct itself in the long run even without any intervention by the policymakers. (7 marks)

QUESTION 3 (15 marks)

"There are always some workers without jobs, even when the overall economy is doing well. In other words, the unemployment rate never falls to zero; instead, it fluctuates around the natural rate of unemployment".

Do you agree with this statement? Critically examine.