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    Inflation Its Causes and Effects

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    Poonam Sharma
    Inflation is defined as a sustained increase in the general price level over time. It is caused by an increase in the supply of money or available credit compared to the availability of goods and services. High or unpredictable inflation rates are generally harmful to an economy as they reduce the real value of money and savings over time and increase uncertainty. While moderate, predictable inflation may help mitigate economic recessions, high or variable inflation adds inefficiencies to markets and makes planning difficult for businesses and consumers. Governments use monetary, fiscal, and other policies to control inflation and maintain price stability.

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    Inflation Its Causes and Effects

    Uploaded by

    Poonam Sharma
    26 views28 pages
    Inflation is defined as a sustained increase in the general price level over time. It is caused by an increase in the supply of money or available credit compared to the availability of goods and services. High or unpredictable inflation rates are generally harmful to an economy as they reduce the real value of money and savings over time and increase uncertainty. While moderate, predictable inflation may help mitigate economic recessions, high or variable inflation adds inefficiencies to markets and makes planning difficult for businesses and consumers. Governments use monetary, fiscal, and other policies to control inflation and maintain price stability.

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    Inflation

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    Inflation is defined as a sustained increase in the general price level over time. It is caused by an increase in the supply of money or available credit compared to the availability of goods and services. High or unpredictable inflation rates are generally harmful to an economy as they reduce the real value of money and savings over time and increase uncertainty. While moderate, predictable inflation may help mitigate economic recessions, high or variable inflation adds inefficiencies to markets and makes planning difficult for businesses and consumers. Governments use monetary, fiscal, and other policies to control inflation and maintain price stability.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    26 views28 pages

    Inflation Its Causes and Effects

    Uploaded by

    Poonam Sharma
    Inflation is defined as a sustained increase in the general price level over time. It is caused by an increase in the supply of money or available credit compared to the availability of goods and services. High or unpredictable inflation rates are generally harmful to an economy as they reduce the real value of money and savings over time and increase uncertainty. While moderate, predictable inflation may help mitigate economic recessions, high or variable inflation adds inefficiencies to markets and makes planning difficult for businesses and consumers. Governments use monetary, fiscal, and other policies to control inflation and maintain price stability.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 28

    INFLATION ITS CAUSES AND EFFECTS

    INTRODUCTION
    Inflation is defined as a sustained increase in the price level or a fall in the value of money. It is measured as a rate percentage per unit time, say a year or month. When the level of currency of a country exceeds the level of production, inflation occurs. Value of money depreciates with the occurrence of inflation.

    DEFINITION
    According to C.CROWTHER, Inflation is

    state in which the value of money is falling and the prices are rising.
    In economics , the word inflation refers to

    general rise in prices measured against a standard level of purchasing power.

    RATE OF INFLATION
    Rate of inflation is the rate of change of the general

    price level. It is measured by simple formula: Rate of inflation t=Pt-Pt-1 Pt-1


    Where, Pt=price level in the year t Pt-1=price level in the year t-1,the base year
    If there is a decline in the rate of inflation such a

    situation is called DISINFLATION.

    EFFECTS ON ECONOMY
    GENERAL EFFECT NEGATIVE EFFECT POSITIVE EFFECT

    GENERAL EFFECT
    An increase in the general level of

    prices implies a decrease in the purchasing power of the currency.

    NEGATIVE EFFECT
    High or unpredictable inflation rates are regarded

    as harmful to an overall economy.


    Negative effects of inflation include a decrease in

    the real value of money and other monetary items over time.

    POSITIVE EFFECT
    Positive effects include a mitigation of economic recession, and debt relief by reducing the real level of debt.

    OTHER TERMS .
    DISINFLATION the reduction of

    rate of inflation .
    HYPERINFLATION-an out of control

    inflationary spiral .
    STAGFLATION high inflation

    combined with economic stagnation and unemployment.

    TYPES OF INFLATION..
    Demand pull Inflation .
    Cost push theory .

    Pricing power Inflation .


    Sectoral Inflation .

    DEMAND PULL INFLATION..


    It is caused by increases in

    aggregate demand due to increased private and government spending.

    Ep1
    Ep

    Eq

    Eq1

    D1

    12

    Main causes of demand pull inflation


    A depreciation of the exchange rate increases the price of

    imports and reduces the foreign price of UK exports A reduction in direct or indirect taxation - consumers will have more disposable income causing demand to rise Rapid growth of the money supply as a consequence of increased bank and building society borrowing Rising consumer confidence and an increase in the rate of growth of house prices Faster rates of economic growth in other countries providing a boost to UK exports overseas (an injection of AD)

    COST PUSH THEORY..


    It is also called supply shock

    inflation, is caused by a drop aggregate supply .


    This may due to natural disasters ,

    or increased prices of inputs..

    S1 S

    Ep1

    E1 E

    5/1/2012 8:23 PM

    Ghanshyam iilm gurgaon

    15

    Cost Push Inflation


    Occurs when costs of production are increasing
    Causes: External shocks (commodity price fluctuations) A depreciation in the exchange rate Acceleration in wages Leads to inward shift in SRAS curve Firms raise prices to protect their profit margins better able to do this when market demand is price inelastic Wages often follow prices A rise in inflation can lead to rising inflationary expectations

    PRICING POWER INFLATION.


    Pricing Power Inflation is more often called as

    administered price Inflation.. This type of Inflation occurs when the business houses and industries decide to increase the price of their respective goods and services to increase their profit margins.

    SECTORAL INFLATION
    The Sectoral Inflation takes place

    when there is an increase in the price of the goods and services produced by a certain sector of industries

    REASONS OF INFLATION
    Lack of balance in the countrys budget. Financial problem, financing 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. Imported Inflation . Problems with financial planning.

    EFFECTS OF INFLATION
    They add inefficiencies in the market, and make it

    difficult for companies to budget or plan long-term.


    Uncertainty about the future purchasing power of

    money discourages investment and saving.

    5/1/2012 8:23 PM

    Ghanshyam iilm gurgaon

    20

    EFFECTS OF INFLATION
    There can also be negative impacts to trade from an

    increased instability in currency exchange prices caused by unpredictable inflation. Higher income tax rates. Inflation rate in the economy is higher than rates in other countries; this will increase imports and reduce exports, leading to a deficit in the balance of trade.

    5/1/2012 8:23 PM

    Ghanshyam iilm gurgaon

    21

    EXAMPLE
    Increase in the price of wheat
    Increase in the price of world oil Increase in the price of rice

    Increase in the price of CNG

    5/1/2012 8:23 PM

    Ghanshyam iilm gurgaon

    22

    MEASURES TO CONTROL INFLATION


    MONETARY POLICY FISCAL POLICY OTHER MEASURES

    MONETARY POLICY
    It aims at reducing money supply in the market.

    CREDIT CONTROL ISSUE OF NEW CURRENCY

    FISCAL POLICY..
    It Majorly pertains to taxation and interest policies .

    REDUCTION IN UNNECESSARY EXPENDITURE INCREASE IN TAX INCREASE IN SAVING SURPLUS BUDGET PUBLIC DEBT

    OTHER MEASURES
    Are those which aim at increasing aggregate

    supply addressing aggregate demand directly INCREASE PRODUCTION. RATIONALE WAGE POLICY. PRICE CONTROL. RATIONING.

    CONCLUSION
    From various monetary , fiscal and other

    measures it becomes clear that to control inflation government should adopt all measures simultaneously.
    Inflation is like a hydra-headed monster which

    should be fought by using all the weapons at the command of the government.

    THANKYOU
    PRESENTED BY :Poonam

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