CAUSES , MEASURES AND EFFECTS OF INFLATION

Inflation :

An increase in the general level of prices in an economy that is sustained over a period of time is called inflation.

When demand is more than the supply that may lead to inflation

When the level of currency of a country exceeds the level of production, inflation occurs.

Value of money depreciates with the occurrence of inflation.

CAUSES OF INFLATION

FACTORS AFFECTING DEMAND

FACTORS AFFECTING SUPPLY

Factors affecting demand :

1. Increase in money supply

2. Increase in Disposable Income

3. Increase in Public Expenditure

4. Increase in Consumer Spending

5. Cheap Monetary Policy

(credit induced inflation)

6. Deficit Financing

(deficit induced inflation)

7. Expansion of the Private Sector

8. Black Money

9. Repayment of Public Debt

10.Increase in Exports

Factors affecting supply:1. Shortage of Factors of Production

2. Industrial Disputes

3. Natural Calamities

4. Artificial Scarcities

5. Increase in Exports

6. Lop-sided Production

7. Law of Diminishing Returns

8. International Factors

Measures to Control Inflation :

MONETARY

MEASURES

FISCAL MEASURES

OTHER MEASURES

Calculation of Inflation:

Inflation is rate of change in the price level.

If the price level in the current year is P1 and in the previous year P0.

The inflation for the current year is

[(P1 - P0) / P0] x 100

MONETARY MEASURES :

Monetary measures aim at reducing money incomes.

1. Credit Control

2. Demonetization of Currency

3. Issue of New Currency

Fiscal Measures :

1. Reduction in Unnecessary Expenditure

2. Increase in Taxes

3. Increase in Savings

4. Surplus Budgets

5. Public Debt

OTHER MEASURES :

1. To Increase Production

(food, clothing, kerosene, sugar, vegetables ,etc.,)

2. Rational Wage Policy

3. Price Control

(direct control to check inflation)

4. Rationing

5. Conclusion

Effects of Inflation :

Higher Inflation = Higher Interest Rates

Higher Interest Rates = More Incentive to Save

More Saving + Less spending = Less Money Circulating

Less Money Circulating = Slower Economy = Lower Inflation

Low Inflation = Low Interest rates

Lower Interest Rates = More Incentive to Spent

More Spending = More Money Circulating in the Economy

More Money Circulating = Faster Economy = Higher Inflation

Factors Affecting Inflation :

1. Effects on Redistribution of Income and Wealth

2. Debtors and Creditors

3. Salaried Persons

4. Wage Earners

5. Fixed Income Group

6. Equity Holders or Investors

7. Businessman

8. Agriculturists

9. Government

10.Conclusion

THE PHILLIPS CURVE :1. Known after the British economist A.W. Phillips.

2. It expresses an inverse relationship between the rate of unemployment and the rate of income in money wages.

3. Phillips derived the empirical relationship that when unemployment is high, the rate of increase in money rate is low.

4. On the other hand, when unemployment is low the rate of increase in money wage rate is high.

5. The Second factor which influences this inverse relationship is the nature of business activity.

Phillips Curve:

Percentage change in money wage rate (W) is given on the vertical axis with the rate of unemployment(U) on the horizontal axis.

The convex curve indicates that = % Δ in money wages / Δ in

employment.(i.e) money wage ꜛ, unemployment ꜜ and vice versa.

In the fig when the money wage rate is 2 percent, the unemployment rate is 3 per cent. But when the wage rate is high at 4 percent, the unemployment is low at 2 per cent.

Continue:

Thus there is a trade off between the rate of change in money wage and the rate of unemployment.

This means that when the wage rate is high the unemployment rate is low and vice versa.

It is to be noted that PC is the “conventional” or original downward sloping Phillips curve which shows a stable and inverse relation between the rate of unemployment and the rate of changes in wages.