2. Discussion Question: Hanging On to Dollars in Zimbabwe Prior to 2009, Zimbabw

Question

2. Discussion Question: Hanging On to Dollars in Zimbabwe
Prior to 2009, Zimbabwe experienced several years of declining real GDP. According to an article in the Wall Street Journal ( see video), “ After Zimbabwe abandoned its currency in favor of the greenback, the economy grew at an annual rate of 6% in 2009 and 9% in 2010.
a). Why would Zimbabwe abandon its own currency to begin using U.S. dollars?
b). Why would using the U.S. dollars as its currency have enabled the economy of Zimbabwe to resume growing?
c). what potential problems could using U.S. dollars rather than its own currency pose for the Zimbabwean government?

Explanation / Answer

a). Why would Zimbabwe abandon its own currency to begin using U.S. dollars?

In order to minimize fluctuations. Since the US dollar is more stable, adopting the dollar as its own currency will reduce fluctuations in the economy

b). Why would using the U.S. dollars as its currency have enabled the economy of Zimbabwe to resume growing?

Because of reduced instabilities and a more standardized currency being used.

c). what potential problems could using U.S. dollars rather than its own currency pose for the Zimbabwean government

Inability to control any external event affecting the dollar and reduced monetary authority

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