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Inflation

The document provides an overview of inflation, defining it as a sustained increase in price levels and a decrease in the value of money. It discusses various types of inflation, including demand-pull and cost-push inflation, as well as their causes and effects. Additionally, it outlines remedies and measures to control inflation, such as monetary and fiscal policies.

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ALEENA KANNI
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29 views23 pages

Inflation

The document provides an overview of inflation, defining it as a sustained increase in price levels and a decrease in the value of money. It discusses various types of inflation, including demand-pull and cost-push inflation, as well as their causes and effects. Additionally, it outlines remedies and measures to control inflation, such as monetary and fiscal policies.

Uploaded by

ALEENA KANNI
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIT 5: INFLATION

Dr. Sasmita Behera


Assistant Professor
School of Economics and Commerce
MIT World Peace University, Pune

Email id- [email protected]


CONTENTS
• Introduction
• Definitions
• Types of Inflation
• Causes of Inflation
• Effects of Inflation
• Remedies to control
Inflation
INFLATION

•Inflation is defined as a
sustained increase in the
price level or a fall in the
value of money.

•Inflation is a rise in general


level of prices of goods and
services in the country over
a period of time.
•In a broad sense , inflation is
that state in which the prices of
goods and services rise on the
one hand and value of the
money falls on the other .

•Asthe cost of goods and


services increase , the value of
a currency declines because you
won’t be able to purchase as
much with that currency as you
could have last month or year.
Definition of inflation according to few
economists

MEYER:
“An increase in the prices
that occurs after full
employment has been
attained.”
CROWTHER:
“In the state of inflation, the
prices are rising , i.e., the value of
money is falling.”
Coulburn:
“ In inflation , too
much money chases
too few goods.”
Other Terms Related To Inflation
Dis-inflation:

The reduction in the rate of inflation is


termed as Disinflation.

Stagflation:

High inflation combined with economic stagnation and


unemployment.
Hyperinflation:

An out of control inflationary


spiral is known as Hyperinflation.
HYPERINFLATION

DISINFLATION STAGFLATION
Types of
Inflation

1. Demand Pull Inflation


2. Cost Push Inflation
Demand Pull Inflation

•The demand for goods and services in


and production remains same or doe
increase as fast.

•The excess demand results in prices b


pulled up.
Demand Pull Inflation

•The demand pull inflation


occurs when total demand
for goods and services
exceeds the total supply.
DEMAND PULL INFLATION USING AS-AD
DIAGRAM
Cost Push Inflation

• The cost push inflation


is
caused by
an increase in the cost
of production.
• Increased costs push
up the price level.
COST PUSH INFLATION USING AS-AD DIAGRAM
Causes of
Inflation:

•Population explosion

•Political Instability

•Imported goods

•Increase in wages and


salaries

•Climatic factors
Causes of
Inflation:

• Oil prices

• Corruption

• Slow agricultural
development

• Slow Industrial growth


Effects of
Inflation:

• Unemployment
• Decreasing the purchasing
power
• Decrease in stock
• Exports decline
•Investment fall
Remedies to control
Inflation:

1. Increase the supply of essential


items
2. Tight monetary policy
3. Reduce government expenditures
Remedies to control
Inflation:

4. Control deficit financing


5. Provision of subsidies
6. Explore new energy resources
such as : solar energy , wind
energy, and construction of new
dams, etc…
7. Population control
Measures to control
Inflation:

There are broadly three


ways of controlling
inflation in an economy

1. Monetary Measures
2. Fiscal Measures
3. Direct or Other Measures
1. Monetary
Measures

Monetary policy is the process by which


the monetary authority of a country controls
the supply of money, often targeting a rate of
interest for the purpose of promoting economic
growth and stability. The official goals usually
include relatively stable prices and low
unemployment. Monetary policy is adopted by
central bank of a country.

• Most central banks use high


interest rates as the traditional
way to fight or prevent inflation
• Decrease money supply
• Decrease availability of credit
from banks
• Decrease currency control
2. Fiscal
Measures.

Fiscal policy is the


deliberate change in
either government
spending or taxes, to
simulate or slow down
the economy.

• Increase direct taxes


• Increase indirect taxes
• Reduce government
spending
• Increase in savings
• Surplus budgets
3. Direct or Other
measures.

It means the step of government


like rationing of goods and freezing
of prices and wages. The
government can also increase
voluntary savings of people by
giving them various incentives.

• To Increase Production
• Rational Wage Policy
• Price Control
• Control of smuggling
• Industrial peace
• Control of money supply
• No deficit financing
• Population control
• Simple living

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