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INFLATION

DESIRED LEARNING
OBJECTIVES

The students must be able to


comprehend:What is inflation
What are different types of inflation.
How does it influences different
individuals and businesses?
What is meant by: Demand-pull Inflation, and
Cost-push Inflation.

WHAT IS INFLATION?
Inflation occurs in an economy, when the
general level of prices is rising.
Rate of inflation in year t = 100 x (Pt Pt-1)/Pt-1
The Consumer Price Index (CPI) measures the
cost of a market basket of consumer goods
and services relative to the cost of that bundle
during a particular base year.
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Levels OF INFLATION
Low Inflation: It is characterised by prices that
rise slowly and predictably.
Galloping Inflation: It is the double-digit or
triple-digit rise in prices, 20, 100, 200%
Ex: Argentina, Chile and Brazil had suffered 50700% inflation in 70s and 80s.
Hyperinflation: It refers to a state when prices
are rising a million, even a trillion percent per
year.
Ex: Germany in 1920s CPI from 1
10,000,000,000. If a person had 300 mill marks
worth of assets in 1922, two years later, they
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would hardly worth a piece of candy.

ECONOMIC IMPACTS OF INFLATION


Opinion polls indicate: Inflation is the enemy
No 1 of sitting governments.
What is so dangerous about inflation?
Do price of all goods rise during inflation?
No, changes in relative prices occur. As a
result: Redistribution of income and wealth among different
groups takes place.
Relative prices and output of different goods and
services are distorted.
Distortions occur in output and employment for the
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economy as a whole.

ECONOMIC IMPACTS OF INFLATION


Impacts
on
Income
and
Wealth
Distribution: Inflation is blessing if you
owe money to someone; but is a curse if
you have lend to someone.
Wealth transfers from buyers to sellers.
It impacts economic efficiency since it
distorts prices and price signals. It
becomes difficult to distinguish between
the relative prices and overall price level.
Inflation also leaves distortionary effect
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on value of the taxes collected.

DEMAND-PULL AND COST-PUSH


INFLATION
Demand-pull
Inflation:
It
occurs
when
aggregate demand rises more rapidly than the
economys productive potential.
Ex: Deficit financing by printing more currency
notes
Cost-push Inflation: It occurs when prices rise
due to increases in costs.
Ex: Rise in oil prices raise production cost of
goods, which lead to higher selling prices.
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