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Module V Inflation

Inflation is a sustained increase in the general price level of goods and services in an economy, with various causes including demand-pull and cost-push factors. Demand-pull inflation occurs when aggregate demand exceeds supply, while cost-push inflation arises from increased production costs. Measures to control inflation include monetary policies, fiscal measures, direct controls, and other strategies aimed at stabilizing prices and promoting economic growth.

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4 views21 pages

Module V Inflation

Inflation is a sustained increase in the general price level of goods and services in an economy, with various causes including demand-pull and cost-push factors. Demand-pull inflation occurs when aggregate demand exceeds supply, while cost-push inflation arises from increased production costs. Measures to control inflation include monetary policies, fiscal measures, direct controls, and other strategies aimed at stabilizing prices and promoting economic growth.

Uploaded by

Keerthan
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© All Rights Reserved
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What is Inflation ?

 Inflation is a sustained increase in the general price level


of goods/services in an economy over a period of time.
 An increase in the average price level of all products in
an economy.
 There is no unanimity among economist regarding the
origin, causes and effects of inflation.
1. Demand pull inflation
 Demand-pull inflation arises when the total demand for
goods and services (i.e. 'aggregate demand') increases to
exceed the supply of goods and services (i.e. 'aggregate
supply') that can be sustainably produced.
 But why does aggregate demand rise?
 Classical economists attribute this rise in aggre­gate
demand to money supply.
 If the supply of money in an economy ex­ceeds the
available goods and services, DPI appears.
1. Demand pull inflation
 Keynesians argue that there can be an autonomous
increase in aggregate de­mand or spending.
 Such as a rise in con­sumption demand or investment or
government spending or a tax cut or a net increase in
exports (i.e., C + I + G + X – M) with no increase in
money sup­ply.
1. Reasons for Demand pull inflation
 Rise in employment (income)
 Population growth
 Rise in fiscal deficit (deficit financing)
 Increase public expenditure
 Decrease in taxes
 Increase in exports
 Credit expansion
2. Cost push inflation
 It occurs when there is fall in the level of supply.
 This is due to increase in the cost of production.
 Cost of pro­duction can rise due to an increase in the
prices of raw materials, wages, etc.
 High cost of production leads to high prices of
commodities.
2. Reasons for cost puch inflation
 Artificial scarcity of goods (Hoarding)
 Cost of production (corporate tax)
 Scarcity of factors of production
 Natural calamities
 Increase in exports (ex. India- rice)
 War
 Global rise in prices
• Others causes of Inflation
1. Demand-cum-Cost Inflation
2. Development Inflation
3. Wage – Price Spiral
4. Quantity of Money
International Data on Inflation
and Money Growth
Inf lation rate10,000
Democratic Republic
(percent,
logarithmic Nicaragua of Congo
scale) A ngola
1,000 Georgia
Brazil

100 Bulgaria

10
Kuwait Germany

1 USA
Canada
Oman Japan

0.1
0.1 1 10 100 1,000 10,000
Money supply growth (percent, logarithmic scale
HOW
TO
CONTROL
INFLATION

Measures to Control Inflation


A. Monetary Measures

1. Bank Rate
2. Open Market Operations
3. Minimum Reserve Ratio
4. Selective Credit Control
1. Bank Rate
2. Open Market Operations
3. Minimum Reserve Ratio
4. Selective Credit Control

 RBI adopts these measures to influence certain sectors.


 The central bank divert the flow of credit from
unproductive (inflation-prone) sectors to the
productive (growth oriented) sectors.
B. Fiscal Measures

1. Increase in Taxation
2. Reduction in Public Expenditure
3. Public Borrowing
4. Control of Deficit Financing
i. FRBM Act (3% GDP)
C. Direct Controls
 Price Control
– Price Floor
– Price Ceiling
 Rationing
– Food items (rice, wheat, etc.)
D. Other Measures
 Raising the Level of Output
 Proper Wage Policy
 Population Control
 Promotion of Savings
Thank You

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