Final answer:
Inflation often leads to reduced confidence in a country's currency, unintended redistributions of purchasing power, and can negatively impact economic management trust. The hyperinflation in Zimbabwe serves as an example of how excessive money printing to cover budget deficits can devalue currency, prompting a switch to a foreign currency.
Step-by-step explanation:
One problem that happens when inflation occurs in a country is that it usually leads to reducing the citizens' confidence in a country's currency. This decrease in confidence is due to the value of the currency declining as a result of too much money being in circulation, chasing too few goods. For example, in Zimbabwe, the government financed its huge budget deficits by printing higher denominations of currency, which eventually led to the adoption of the U.S. dollar to stop hyperinflation.
Moreover, inflation can cause a decrease in real wealth and damage confidence in a country's ability to manage its spending. If a government lets inflation rise above the interest rate it pays on its debts, it repays at a negative real interest rate. This causes uncertainty in the financial markets and can lead to a loss of confidence in economic management. Inflation also leads to unintended redistributions of purchasing power, hurting those who have financial investments that do not keep up with the inflation rate, effectively resulting in a negative real rate of return. For instance, money in a savings account earning interest below the inflation rate decreases in real value, harming the saver.