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Theory of inflation

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Theory of inflation

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  5. Theory of Inflation For More Live Classes& PDF https://www.yuvaplus.in

  6. Definition of Inflation 1.Inflation is sustained rise in the general price level( Average price of a set of selected goods and services ) in an economy over a period of time. 2. Inflation is sustained fall in the purchasing power of money>> When the general price level rises,each unit of currency buys fewer goods and services >>Consequently, inflation reflects a reduction in the purchasing power. 3. Inflation is sustained reduction in the value of money 4. Inflation is also a phenomenon of increase in money supply in economy>>Monetary Inflation. For More Live Classes& PDF https://www.yuvaplus.in

  7. Types of Inflation Inflation is classified according to> •Rate of inflation • Scope of inflation • Government intervention • Causes of inflation For More Live Classes& PDF https://www.yuvaplus.in

  8. Classification of inflation as per rate of inflation • 1.Creeping Inflation : • It is also known as mild inflation or low inflation. • The annual rate of general price rise is low >>Between (2–3) % • If this rate or rise in price is continued, then it is considered good for the economy as producers and traders make reasonable profits which encourage them to invest more. • This inflation is manageable. For More Live Classes& PDF https://www.yuvaplus.in

  9. 2.Walking Inflation : • It is also called trolling inflation. • When the annual rate of rising prices is more than creeping inflation (i.e., 3-10 per cent), then it is called walking inflation. • This inflation must be taken seriously as this is a warning for the occurrence of running/galloping inflation. If not checked, it can result in galloping inflation. • When it rises over 4%, Central Banks will be increasingly concerned. For More Live Classes& PDF https://www.yuvaplus.in

  10. 3.Galloping Inflation : • When annual inflation occurs for more than 10 per cent and up to 50 per cent. it refers to galloping inflation. • Due to this, businesses and employee's income cannot keep up with the costs and the prices. • Even, foreign investors avoid such unstable economies for investment. • This situation is also termed as hopping or running inflation. For More Live Classes& PDF https://www.yuvaplus.in

  11. 4. Hyperinflation : • It is an extreme form of inflation where the prices rise at an alarming high rate (i.e., more than 50 per cent every month). • Hyperinflation occurs when there is a large increase in money supply In extreme situations, the value of national currency reduces to almost zero. For More Live Classes& PDF https://www.yuvaplus.in

  12. Classification of inflation as per scope 1. Comprehensive : When prices of commodities rise throughout the economy without any exception. 2. Partial :This inflation is sporadic nature. It takes place when the prices of some goods rise owing to a temporary shortage. For More Live Classes& PDF https://www.yuvaplus.in

  13. Classification of inflation as per government intervention 1. Open Inflation : An inflation is said to be open when the government takes no steps to check the rise in the price level. 2. Repressed Inflation : When the government actively intervenes to check the rise in the price level. For More Live Classes& PDF https://www.yuvaplus.in

  14. Classification of inflation as per causes • Demand Pull Inflation • Cost Push inflation For More Live Classes& PDF https://www.yuvaplus.in

  15. Demand Pull Inflation Full Employment Level : Full employment is an economic situation in which all the available resources of the economy are fully utilised. Demand pull inflation : Demand-pull inflation is when the aggregate demand for a good or service is greater than aggregate supply >>Allowing producers to raise prices during full employment situation in the economy. For More Live Classes& PDF https://www.yuvaplus.in

  16. Inflationary Gap : The Inflationary gap is a situation which arises when Aggregate demand in an economy exceeds the Aggregate supply at the full employment level. To check demand pull inflation arrangements should be made to expand the supply in theeconomy. For More Live Classes& PDF https://www.yuvaplus.in

  17. Cost Push Inflation There exists a situation in an economy where inflation is fuelled up not because of increase in aggregate demand but mainly due to increase in the cost of producing goods and services. The cost can be increased mainly due to three factors > • Increase in wages ( Wage inflation ) • Increase in profit margin ( Profit inflation ) • Increase in prices of raw materials ( Raw material push inflation ) >> It is sometimes called supply shock inflation. For More Live Classes& PDF https://www.yuvaplus.in

  18. Important terms related to Inflation • Stagflation : The situation of rising prices along with falling growth and employment ( Stagnation in economy ) is called as stagflation. • Disinflation :Disinflation is a situation in which the rate of inflation falls over a period of time >>When the inflation rate is falling from say 5% to 3%. • Reflation :It is a situation when inflation returns after a deflationary phase indicating economic recovery >>Reflation policies can include reducing taxes, changing the money supply and lowering interest rates. For More Live Classes& PDF https://www.yuvaplus.in

  19. •Skewflation:It means the skewness of inflation among different sectors of the economy — some sectors are facing huge inflation, some are none and some are having deflation. • Deflation : It is the opposite of inflation >>Deflation refers to situation, where there is decline in general price levels • Deflation occurs when the inflation rate falls below 0% (Negative inflation rate). For More Live Classes& PDF https://www.yuvaplus.in

  20. Causes of inflation 1. Increase in Public Spending 2. Deficit Financing of Government Spending 3. Increased Velocity of money Circulation 4. Population Growth 5. Hoarding 6. Genuine Shortage 7. Exports 8. Trade Unions For More Live Classes& PDF https://www.yuvaplus.in

  21. 9. Direct Tax Reduction 10.The imposition of or rise in Indirect Taxes 11.Price-rise in the International Markets 12.Devaluation. For More Live Classes& PDF https://www.yuvaplus.in

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