Inflation
Inflation
Inflation
Inflation
Inflation
This is the process by which the price level rises and money loses value. There are two kinds of inflation: a) Demand pull b) Cost push
Hyper inflation
Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Price increases are so out of control that the concept of inflation is meaningless. The most famous example of hyperinflation occurred in Germany between January 1922 and November 1923. By some estimates, the average price level increased by a factor of 20 billion!
(a) Austria Index (Jan. 1921 = 100) 100,000 10,000 1,000 100 Price level Money supply Index (July 1921 = 100) 100,000
(b) Hungary
1921
1922
1923
1924
1925
1921
1922
1923
1924
1925
Stagflation
A condition of slow economic growth and relatively high unemployment accompanied by inflation. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. At least some central banks have expressed concern over inflation even as the global economy seems to be slowing down.
Money supply
/4
1.33
12
4 Money demand
(Low)
Quantity of Money
(High)
MS1
MS2
Price Level, P
1
1. An increase in the money supply . . . A
(Low)
/4
12
14
B Money demand
(Low) 0
M1 M2
(High)
Quantity of Money
Major Groups: I. Primary Articles (98 items)- 22.02 % Food Articles, Non-Food Articles, Minerals II. Fuel, Power, Light & Lubricants (19 items) - 14.23 % III. Manufactured Products (318 items) - 63.75 % Food Products Beverages, Tobacco & Tobacco Products Textiles etc
The Office of the Economic Advisor (OEA) compile the WPI numbers on weekly basis On Friday inflation figures are announced The working group on WPI, headed by Planning Commission member Abhijit Sen, has worked out a new index The base year of the new index :2000-01 The basket of commodities- around 1200 To Reflect the post-liberalisation consumption pattern
Discussion question
Why is inflation bad?
Unanticipated inflation is bad because it makes the economy behave like a giant casino. Gains and losses occur because of unpredictable changes in the value of money. If the value of money varies unpredictably over time, the quantity of goods and services that money will buy will also fluctuate unpredictably. Resources are also diverted from productive activities to forecasting inflation. Unanticipated inflation leads to : a) Redistribution of income, borrowers and lenders b) Too much or too little lending or borrowing
Menu costs
Menu costs are the costs of adjusting prices. During inflationary times, it is necessary to update price lists and other posted prices. This is a resource-consuming process that takes away from other productive activities.
Taming Inflation
Monetary policy- Bank rate policies, Open Market operations, Reserve requirement ratios Fiscal policy-taxation, public borrowing, public expenditure Direct Control-Fixing ceiling prices of the products, Rationing. Miscellaneous methods-Controlling Wages, Controlling population growth
MS1
MS2
Price Level, P
1
1. An increase in the money supply . . . A
(Low)
/4
12
14
B Money demand
(Low) 0
M1 M2
(High)
Quantity of Money