Why did some of the formerly Communist countries of Eastern Europe have inflation rates over 100%, while others didn't? Which factor was more important in explaining the differing inflation rates, real money demand or nominal money supply? Why did the countries with high inflation rates allow inflation to get so high?
What will be an ideal response?
Some countries had high inflation while others didn't because of differences in rates of money growth. Real money demand didn't vary enough to explain the differences in inflation rates; instead, nominal money supply growth was strongly correlated with inflation. The countries allowed inflation to get so high because they were trying to finance government expenditures by printing money.
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