2. Introduction
Definitions
Types of inflation
Effects of Inflation
Controlling inflation
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3. In economics, inflation is a rise in the general
level of prices 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.
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4. According to Prof. Samuelson “inflation
occurs when general level of prices & cost are
rising over a period of time”.
The overall general upward price movement
of goods and services in an economy often
caused by a increase in supply of money.
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6. Aggregate demand is higher than supply
Inflation rises
Employment rises
GDP rises
Cost - Push Inflation
Cost of important goods or services rise
No suitable alternative available
Rising unemployment
Falling GDP
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7. Results from past events and persists in the
presence
Results from previous increases in prices caused
by demand-push or cost-pull.
Example : Workers believe that prices will rise so
they demand more wage. The higher wage will
cause producers to raise their prices.
Vicious circle
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8. Negative Effects:
- Cost Push inflation : Can prompt employees to ask for more
wages
- Hoarding : Due to declining purchasing power of money
- Social unrests and revolts
- Hyperinflation : Out of control inflation leads to inability to
supply goods
- Allocation Efficiency/Menu costs : Buyers and sellers
constantly have to change budgets
- Instable business cycles : Borrowings are more leading to
malinvestments finally leading to bankruptcy
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9. - Inflation is misleading because it makes direct price
comparisons from one year or era to another meaningless.
- Inflation never lets up-is always there causing instability
- When you don't adjust your prices in line with inflation,
you have effectively lowered them.
- Instability of the market with inflation
- Financial planning difficult
- Provokes employees to ask for more wages
- People tend to save less as the prices of commodity are high
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10. - Reflects at least some economic activity
- More desirable than deflation
- Leads increase in food prices of important
items
- Hotel industry profits decline as value of
money goes down
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11. There are broadly two ways of controlling inflation
in an economy:
1). Monetary measures
2). Fiscal measures
Monetary Measures
The most important and commonly used method to
control inflation is monetary policy of the Central
Bank. Most central banks use high interest rates as
the traditional way to fight or prevent inflation.
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12. II). Fiscal Measures
Fiscal measures to control inflation include
taxation, government expenditure and public
borrowings.
Fiscal measures used to control inflation
include:
(i) Increase in Taxes
(ii)Increase in savings
(iii)Surplus budgets
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