Inflation

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Inflation means generally a considerable and persistent rise in the general level of prices . According to Ackley “ inflation is persistent and appreciable rise in the general level of average of prices” Inflation means a ‘persistent’ and ‘ appreciable ‘ increase in the general level of prices . A moderate rate of inflation is considered to be desirable for the economy. .the limit of desirable inflation varies from country to country and from time to time . Desirable rate of inflation can be det
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  Inflation means generally a considerable and persistent rise in the general level of prices .According to Ackley “ inflation is persistent and appreciable rise in the general level of averageof prices”Inflation means a ‘persistent’ and ‘ appreciable ‘ increase in the general level of prices .A moderate rate of inflation is considered to be desirable for the economy. .the limit of desirableinflation varies from country to country and from time to time .Desirable rate of inflation can be determined on the basis of 1)keeping economic outlook optimistic and helping production and employment2)promoting mobilization of resources (savings an investment ) by what is calledinflationary method of financingInflation is usually estimated by calculating the inflation rate of a price index, usuallythe   Consumer Price Index. The Consumer Price Index measures prices of a selection of goodsand services purchased by a typical consumer . The inflation rate is the percentage rate of change of a price index over time.  TYPES OF INFLATION: Demand-pull Inflation: Demand-pull inflation is also called as wage or excess demand inflation. This type of inflation occurs when total demand for goods and services in an economy exceeds theavailable supply. this, leading to a situation called as demand-pull inflation. War produces this type of inflation as demand for war materials and manpower growsrapidly during that time. Cost-push Inflation: As the name suggests, when the cost of production of goods and services increases,there is likely to be an increase in the prices of finished goods and services. For instance, a rise in the wages of laborers is what raises the unit costs of production andthus raises price. This is less common than demand-pull inflation. This type of inflationmay or may not occur in conjunction with demand-pull inflation. Pricing Power Inflation: Pricing power inflation is more often called as administered price inflation. This type of inflation occurs when the businesses decide to increase their prices to increase their profit margins. Pricing power inflation does not occur at the time of financial crises and economic depression, or when there is a downturn in the economy. This type of inflation is also called as oligopolistic inflation because oligopolies have the power of to  set their own prices. Sectoral Inflation: This is the fourth major type of inflation. The sectoral inflation takes place when there isan increase in the prices of the goods and services produced by a certain sector of industries. For instance, an increase in the cost of crude oil would directly affect all thesectors, which are directly related to the oil industry. Thus, the ever-increasing price of fuel has become an important issue related to the economy all over the world. Thiswould lead to a widespread inflation throughout the economy. If this situation occurswhen there is arecession in the economy, there would be layoffs and it would adversely affect the work force and the economy in turn Hyperinflation: Hyperinflation is also known as runaway inflation or galloping inflation. This type of inflation occurs during or soon after a war. This can usually lead to the completebreakdown of a country’s monetary system. However, this type of inflation is short-lived. In 1923, in Germany, inflation rate touched approximately 322 percent per monthwith October being the month of highest inflation . THEORIES DEMAND-PULL INFLATION: · The demand-pull theory suggests that inflation occurs when aggregate demandexceeds aggregate supply; essentially, the number of people wanting to purchasegoods and services outweighs what is available. When more people want to spendmoney on something, the price will increase to account for the greater demand.This scenario is typically associated with a strong economy and lowunemployment, when more people put money into the economy. COST-PUSH INFLATION: · Cost-push inflation occurs when goods and services become more expensive toproduce, which means prices increase to maintain a desirable profit margin. Ashortage of raw materials also can contribute to cost-push inflation. One example of this was the 1973 oil crisis, when some MiddleEastern and North African countries placed an embargo on oil exports to the U.S. MONETARIST THEORY: The monetarist theory suggests the money supply determines inflation, which  occurs when the rate of a country's income rises faster than economic growth. If additional money is pumped into the economy while prices of goods and servicesremain the same, it will potentially result in inflation. Top causes of an increasedmoney supply are banks increasing lending, or central banks, such as the FederalReserve, printing more money and buying government assets.  KEYNESIANS THEORY: According to Keynesian, inflat i on can be caused by increase in demand and/or increase in cost.Demand-pull inflation is a situation where aggregate demand persistently exceedsaggregate supply when the economy is near or at full employment. Aggregate demandcould rise because of several reasons. A cut in personal income tax would increasedisposable income and contribute to a rise in consumer expenditure. A reduction in theinterest rate might encourage an increase in investment as well as lead to greater consumer spending on consumer durables. A rise in foreigners' income may lead to anincrease in exports of a country. An expansion of government spending financed byborrowing from the banking system under conditions of full employment is another cause of inflation.An increase in demand can be met initially by utilising unemployed resources if theseare available. Supply rises and the increase in demand will have little or no effect on thegeneral price level at this point. If the total demand for goods and services continue toescalate, a full employment situation will eventually be reached and no further increasesin output are possible. This leads to inflationary pressures in the economy.
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