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The document discusses the impact of inflation on the economy, defining inflation as a sustained increase in the general price level of goods and services. It outlines various types of inflation, their causes, effects on income distribution, business uncertainty, and control measures through monetary and fiscal policies. Key points include the distinction between demand-pull and cost-push inflation, as well as the regressive effects on lower-income families.

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8 views9 pages

Presentation 1

The document discusses the impact of inflation on the economy, defining inflation as a sustained increase in the general price level of goods and services. It outlines various types of inflation, their causes, effects on income distribution, business uncertainty, and control measures through monetary and fiscal policies. Key points include the distinction between demand-pull and cost-push inflation, as well as the regressive effects on lower-income families.

Uploaded by

rathorekuldeepsingh358
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© © All Rights Reserved
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The Impact

Of Inflation
On
Economy

Submitted By – Gulshan Nakwal


Reg. No. – 24BBAN0455
BBA 1 - F
Contents:
 Introduction
 Types of Inflation
 Causes of inflation
 Effects of Inflation
 Inflation control Measures
Meaning of Inflation
Inflation is a sustained increase in the general price level of goods
and services in an economy over a period of time. When the
general price level rises, each unit of currency buys fewer goods
and services; consequently, inflation reflects a reduction in
the purchasing power per unit of money – a loss of real value in the
medium of exchange and unit of account within the economy.
Types of Inflation
1. Creeping Inflation - Creeping or mild inflation is when prices rise 3 percent a year or less. According
to the Federal Reserve, when prices increase 2 percent or less it benefits economic growth. This
kind of mild inflation makes consumers expect that prices will keep going up. That
boosts demand.

2. Walking Inflation - This type of strong, or pernicious, inflation is between 3- 10 percent a year It is
harmful to the economy because it heats up economic growth too fast. People start to buy more
than they need, just to avoid tomorrow's much higher prices .

3. Galloping Inflation - When inflation rises to 10 percent or more, it wreaks absolute havoc on the
economy. Money loses value so fast that business and employee income can't keep up with costs
and prices.

4. Hyperinflation - Is when prices skyrocket more than 50 percent a month. It is very rare. In fact, most
examples of hyperinflation have occurred only when governments printed money to pay for
wars. Examples of hyperinflation include Germany in the 1920s, Zimbabwe in the 2000s, and
Venezuela in the 2010s.
Causes of Inflation
Demand-Pull Inflation Demand-pull inflation results from strong consumer demand. Many individuals
purchasing the same good will cause the price to increase, and when such an event happens to a whole
economy for all types of goods, it is called demand-pull inflation. Demand-pull inflation is used
by Keynesian economics to describe what happens when price levels rise because of an imbalance in
the aggregate supply and demand. When the aggregate demand in an economy strongly outweighs the
aggregate supply, prices go up. Economists describe demand-pull inflation as a result of too many dollars
chasing too few goods.

Cost-Push Inflation Cost-push inflation is a situation in which the overall price levels go up (inflation) due to
increases in the cost of wages and raw materials. Cost-push inflation develops because the higher costs
of production factors decreases in aggregate supply (the amount of total production) in the economy.
Since there are fewer goods being produced (supply weakens) and demand for these goods remains
consistent, the prices of finished goods increase (inflation).
Effects of Inflation
 Income redistribution: One risk of higher inflation is that it has a regressive effect on lower-income
families and older people in society. This happen when prices for food and domestic utilities such as
water and heating rises at a rapid rate
 Risks of wage inflation: High inflation can lead to an increase in pay claims as people look to protect
their real incomes. This can lead to a rise in unit labour costs and lower profits for businesses
 Business uncertainty: High and volatile inflation is not good for business confidence partly because
they cannot be sure of what their costs and prices are likely to be. This uncertainty might lead to a
lower level of capital investment spending
 Falling real incomes: With millions of people facing a cut in their wages or at best a pay freeze, rising
inflation leads to a fall in real incomes.
 Income redistribution: One risk of higher inflation is that it has a regressive effect on lower-income
families and older people in society.
Inflation Control Measures
 Monetary policy One of the important monetary measures is monetary policy. The
central bank of the country adopts a number of methods to control the quantity
and quality of credit. For this purpose, it raises the bank rates, sells securities in the
open market, raises the reserve ratio, and adopts a number of selective credit
control measures, such as raising margin requirements and regulating
consumer credit. one of the monetary measures is to demonetise currency of
higher denominations. Such a measures is usually adopted when there is abundance of
black money in the country.
 Fiscal Measures Monetary policy alone is incapable of controlling inflation. It should,
therefore, be supplemented by fiscal measures. Fiscal measures are highly
effective for controlling government expenditure, personal consumption
expenditure, and private and public investment.
 a) Reduction in Unnecessary Expenditure
 (b) Increase in Taxes
 (c) Increase in Savings
THANK-
YOU!

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