In 2008, the consumer price level in Zimbabwe rose by 157 per cent. Between 1998 and 2008, real GDP fell by 50.7 per cent. The hyperinflation arose mainly because
Answer: (d) The supply side of the economy contracted so much that previously normal (non-inflationary) levels of spending growth were now vastly excessive
Answer: Option (d).
While we can make judgements about whether the Zimbabwean government was spending too much, or whether the Reserve Bank was creating too many reserves and whether the private bank lending rates were excessive, the overwhelming reason that the nation experienced hyperinflation was that the supply capacity of the economy contracted sharply rendering the existing spending excessive.
The supply contraction began when Robert Mugabe introduced land reforms to speed up the process of equality and allowed the revolutionary fighters that gained Zimbabwe's freedom from the white colonial masters to take over productive, white-owned commercial farms which had hitherto fed the population and was the largest employer.
Farming output collapsed, which then led to the central bank rationing foreign exchange that was typically made available to manufacturers to import essential capital equipment. As a result, manufacturing output also declined.
The reality was that the Government could have been running fiscal balances and there still would have been hyperinflation.
Please read my blog post - Zimbabwe for hyperventilators 101 (July 29, 2009) - for a more detailed historical account of what went wrong in Zimbabwe.