Case for homework on Inflation. Title –Dining and dollars in Buenos Aires Back in 2014, the Diner club was among the best-reviewed restaurants in Buenos Aires, Argentina. In fact, it was fully booked well in advance but not too far in advance. Why? because Kelly Brenner, the owner of the restaurant, did not dare to accept reservations, say, for two months ahead, because at the time of booking they couldn't know how much they would have to charge for a meal. In fact, that year many Argentina restaurants had given up printing menus with prices, resorting to using chalkboards so that prices could be easily erased and revised.
In 2014, Argentina was in severe economic distress. Unable to either raise taxes or cut spending, its government ran intractable budget deficits but was unable to borrow on world markets. In addition, the country was suffering from a bout of high inflation, a problem that has occurred frequently in its history. Officially, the inflation rate was 24% that year, but independent analysts put that number closer to 40%.
Luckily for Brenner, most of their customers were American tourists, so they were able to pay in US dollars. The purchasing power of the dollar was very strong in Argentina for American tourists vs the locals. This solution was not available to most other eateries in this region. The Argentina government also imposed restrictions on the locals to not convert the local currency in western currency options. Only a small group of elite households had access to foreign currency on a regular basis.
As of early 2017, the year-old government of Argentina under the direction of President Macri started to bring down the inflation in Argentina to manageable levels. However, if you are a tourist in this region the dinner club closed in this region in 2015 due to the high inflation levels.
Questions:
1. What was the relationship between inflation and the Argentina government's acute budget deficit?
2. What are the implications of Argentina’s inability to get its government deficit under control for Argentine business?
3. Why did the Argentina government try to stop Argentinians from converting pesos into foreign currency such as dollars?