nd reduce inflation. This is because a lack of income makes excess expenditure less permissive. However, in the case of Venezuela, it differs. Venezuela is undergoing extremely high inflation as well as relatively high unemployment rates.

When unemployment is high, the supply for labour is traditionally greater than the demand for it, as the number of individuals seeking work significantly exceeds the number of jobs available. Therefore, increasing wages as a means of employers bidding for the service of employees is unnecessary – and so wages remain stagnant during inflation periods.

As Venezuela demonstrates, an economy can encounter high inflation alongside low economic growth at one time. Several technical explanations can be proposed with regards to why the country’s economic growth is in deficit. A primary one being the concept of demand-pull inflation which comes about as a result of the demand for goods surpassing the supply available. However, no fundamental increase in aggregate demand was displayed in the case of Venezuela. Instead, the supply fell considerably short. The lack of foreign currency reserves lead to the inability to import fundamental commodities beyond a particular point causing a demand-pull inflation.

What’s more, producers increased the prices of their goods and services in order to relay the increased production costs. This is referred to as cost-pull inflation. The lack of ability to secure imports in Venezuela contributed to the rise in production costs. This played a role in the further hindrance of Venezuela’s domestic production (Profolus 2018).

Under Maduro’s regulation, the money supply and minimum wage were increased, in attempt to manage consumer spending capabilities, as already discussed. The monetary explanation – is partially applicable when trying to understand the causes of Venezuela’s hyperinflation and it states that the idea of excess money supply with the same amount of goods leads to the decrease in value of a currency.

The current state of Venezuela, demonstrates the profligacy exhibited that lead to fiscal dominance of monetary policy. In attempt to diminish the gap between spending and revenue, a government may decide to fund expenditures via tax revenues – bonds that are to be paid back through future tax revenues or through central bank seigniorage – could be implemented. Seigniorage reliance from the government is likely to govern a lack of incline to continue using a currency which is losing value. Part of the seigniorage serves a purpose as an inflation tax. The rate of inflation acts as a tax rate therefore an increasing rate of inflation would result in higher levels of revenue for the government. This however, is dependent on the public’s willingness to maintain real money balances as an increase in inflation means a decrease in money balances available for public holding – potentially limiting the revenue generated by the government. In essence, hyperinflation can potentially be perceived as a large scale taxation scheme.