MEANING

w
 is a rise in the general level of prices of goods and

services in an economy over a period of time.

Acc. to Prof. Samuelsons ´Inflation occurs when general

level of prices and cost are rising´
 iypes of inflation

 
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It is a mild and tolerable form of inflation.

It occurs when prices are rising slowly

. When the rate of inflation is less than 10 per cent annually,

or it is a single digit inflation rate, it is considered to be
a moderate inflation in the present the economy.
 reeping Inflation

‡ Inflation at moderate rates but persisting over

long periods.
‡ If inflation is rapid, it inflicts serious losses and
builds up strong political support for measures to
control it. for monetary management
 Galloping Inflation

‡ When the movement of price accelerates rapidly,

‡ running inflation emerges a double digit inflation
‡ of 10-20 per cent per annum .

‡ . Its characteristics are:

1. Developing or progressing at an accelerated rate
2. Galloping like a horse.

§  inflation is really a serious problem.

It causes economic distortions and disturbances.
 ¦  


¦  
 is inflation that is very high or "out of control",

a condition in which prices ¦  







  

 

‡ Hyperinflation is a massive and rapid increase in

the amount of money that is not supported by
a corresponding growth in the output of goods and services.

ihis results in an imbalance between the supply

and demand for the money
 Inflation
i he following photographs help illustrate how money can become worthless when inflation
gets out of control.

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Inflation

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 auses of inflation

Demand pull
ost push
Wage push
Profit push
 DEMAND PULL

‡ It occurs when there is an excess of

demand for goods over their supply.
‡ iherefore any factor that increases
aggregate demand can cause inflation
 auses

‡ Growth in black money:- growth in an

unaccounted money leads to demand for goods.
‡ Increase in population:-raises no. of consumers.
‡ Increase in money supply:-raises money
circulation which in turn leads to demand
‡ Increase in disposable income of the consumer.
‡ Increase in public expenditure.
 ost push inflation

‡ It occurs when rise in price is due to rise in cost

of production in this supply factor plays an
important role.
auses:-
Higher taxes
± An increase in the money wage rate
± An increase in the money price of raw materials, such as
oil.
Cost Push Inflation
 Wage push
‡ attempts to increase wages faster than
productivity .causes:-
Higher wage rate ,Often blamed on unions
 Profit push
Defined as:
- attempts to increase profits by
raising prices
auses:-
Higher profit margin
Often blamed on large
corporations
 -EASONS FO- INFLAiION
‡ lack of balance in the country¶s budget
‡ financial problems, financeing the deficit of money
by printing
‡ Sudden increase in production costs
‡ significant increase in the level of energy resources
‡ faulty structure of the economy
‡ Exported goods far exceeding imported ones
‡ too many monopolies in the economy
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Inflation has a favorable effect on production when there

are unutilized or under-employed resources in existence in an economy .

-ising prices breed optimistic expectations within the business

community, in view of increasing profit margins, because
the price level moves up at a faster rate than the cost of production.
 6
 

 

Inflation redistributes income. Prices of all factors do not rise

in the same proportion..

During inflation, the distribution of shares to the profiteers increases

more than that of the wage earners or fixed-income earners.

All producers , traders and speculators gain during an inflation

because of the windfall profits which arise,
because prices rise at a faster and higher rate than
the cost of production.
6



 

Inflation implies an erosion of the consumer¶s value of money.

It is a form of taxation.
Due to purchasing power the real consumption of the
common people declines.

-ising cost of living during inflation implies falling

standard of living and lowering of general economic welfare
Of the community at large .
 How is inflation measured?

’
’ 


‡ India- the only major country that uses
‡ WPI 1st published in 1902)

‡ What is WPI?
‡ ihe WPI number is a weekly measure of R


 movement for the economy
 ihe onsumer Price Index (PI)

‡ ihe  

  (
) measures the prices
of a fixed basket of consumer goods, weighted
according to each component's share of an average
consumer's expenditures.
 



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‡ Monetary policy involves all the deliberate decisions

and actions by the monetary authorities to influence
r the monetary aggregates,
r the availability of credit,
r interest rates and
r exchange rate
‡ with a view to affecting monetary demand, income,
output, prices and the balance of payments.
 
 



 


opyright © 2005 Pearson Addison-Wesley. All rights reserved. ©


   
 
   
 

 Fiscal Policy

hanges in government expenditures and/or taxes to

achieve particular economic goals, such as low
unemployment, stable prices, and economic growth.

26
 ihe Government Budget and iotal Spending

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‡ iHANK YOU«