Consider the following statements Assertion A Hyperinflation can lead to a loss of confidence in the...........

Economic Affairs Inflation

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Consider the following statements.

Assertion (A): Hyperinflation can lead to a loss of confidence in the currency.

Reason (R): Inflation erodes the value of currency.

In the context of the above, which of these is correct?

A is correct, and R is an appropriate explanation of A.

A is correct, but R is not an appropriate explanation of A.

A is correct, but R is incorrect.

Both A and R are incorrect.

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Explanation:

For e.g. if inflation in India is 5000%, then the very next year the value of Rs. 5000 will be near Rs. 100. It also leads to depreciation in the exchange rate of the currency.

As a result, people lose confidence in the currency and holding it becomes a risky proposition. So, people switch to other forms of wealth like Gold, Foreign Currency (also known as “inflation proof” assets) etc.

It is one of the important reasons for the recent Gold rush in India. Introducing inflation-indexed bonds, Gold bonds is one way of reducing the demand of unproductive physical assets.