Government plays a huge role in a nation.
This is because thegovernment controls the country’s currencies, which controls the rate ofinflation. One of the roles of the government in helping to solve the issue ofhyperinflation is by using contractionary monetary policy. Contractionarymonetary policy can be used by the government through financial institutionsand monetary authorities, such asCentral Banks of countries to reduce money supply, mainly by printing lessmoney and reducing economic activity by increasing interest rates.
Wheninterest rates are increased, less people will want to borrow money because it willcost a lot more due to the higher interest rate. People will tend to save more money,therefore, spending decreases and hyperinflation slows down. Contractionarymonetary policy also means that the availability of credit will be reduced,which can decrease level of consumption and increase savings. Conclusively,contractionary monetary policy will help reduce aggregate demand, and help tosolve the issue of hyperinflation.
Next, government can help to solve the issue ofhyperinflation by implementing a fixed exchange rate to a more stable currency,such as the US Dollar, which is considered as the reserve currency. This methodcan be carried out by the Central Bank of a country, in which they areobligated to exchange the local currency for the reserve currency, which is theUS Dollar at a fixed ratio. This will help in making people save more moneyinstead of spending it, as they are now comforted by the fact that the localcurrency is convertible into US Dollars.
Therefore, they are less willing to spendusing their local currency. This method also reduces the velocity of money, andgives the government, central bank and other money authorities the opportunityto introduce structural reforms in order to save their local currency. Thus,the issue of hyperinflation can be solved.Another way the government can solve the issueof hyperinflation is by using the contractionary fiscal policy. Contractionaryfiscal policy can be used to control inflation so as to reduce national income.This policy will help to slow down demand pull inflation, caused by the excesssupply of money.
This policy is carried out by increasing taxes and reducinggovernment spending. Contractionary fiscal policy will decrease nationalincome, which results in firms spending less money to invest. Therefore,aggregate demand decreases.