Inflation is a highly controversial

..
it was. (irst
by the neo-c~
'1..........
. defined
.
le_ ~
ing nse an pnces as ~ result of the Qc:aa1e t I.' .~
'fhC:y regarded Innallon "IS a dcatroyina
I
...

10

ftaib1c

control whose results undermined

the ruIa

0( __

_ ...

-..

markets and financial ruin of even the prudent....

BUI Keynes in .h~s yetleral Theory allayed allluc:b lean He dkt __
lik~ the nco-clas~lclsts lhOl.t there was always full cmp\oJ"
1 ia ",.eo""
which resulted In hyper-Innallon with Increases in UIC
According to him. there bei~g underemployment in the economy, III iF IF'"
the money .sup~ly leads to lO~rease in aggregate demand, output_~
pent. Starlln~ trom a depression, as the money supply increases. o"tpIl ....
rises proportionately. But as aggregate demand. outpUt and cmpkJyTn at
further. diminishing returns start and cenain botti"nccks appear _ pgW tIeS
rising. This process continues till the full employment level is mw=hrd 'l'b&riIa

in the price level during this period is known as bottleneck injIatitJIl or ........
inflation". If the money supply increases beyond the {un emp\oymcGl ~
output ceases to rise and prices rise in proportion with the money supp\}'. 'l\if
is true inflation, according to Keynes.
Keynes's analysis is subjected tOlwo.main..drawba.cks-FusWllays e~
on demand as the cause of inflation. and neglects the cost side of \Dll1llioL
Second, it ignores the possihiiity that a pri!:e..rise may lead to funbq inr;l! \a.
aggregate demand which may. in turn, lead to funher rise in pri~.
However, the types of inflation during the Second World War. 1n - " ...
diate post-war period. lill the middle of the 19505 were on the Ke~ .. D"~
based on his theory of excess demand. "In the laner 19505. in the UDitr4 SW
unemploYlncnt was higher than it had been in the i.~di.ate pos\:WIt pllMJdof
and yet prices still seemed to be rising. at the same t\m~. the war UDID(an dID
postwar recession had belatedly been replaced by serious COnc:cd-:ef6
problem of inflation. The result was a prolonged debate ... On dirt..
, I

RJ. Bnll and Peler Doyle

(cd.),ll1jlllll()l1.

19(>9.p.1

1b "'~lc:all
UId dJeir followers 81,lie UnivetSi.y of Chicago. inflation
.. "..... pity. mot..", pIIenomcnc;!n.
_In !he words of Friedman. Info",o"
;, .. W;W ..,
""~
II mOMlory ph,nom,non .. and can be product!d
MIy ~ II _rr rapid ;"C"rMSt! Ut tltt! ql101ltif)" of m"n~' than O_UlPU~'" BUI
ac 1III-"'1Ib do nor "I"'C lllal money supply aJOIIt! IS lhe C81Jse~of ml1arlon: As
poiAred out by Hides. MO"r pret!nt ""ublt!s art! nor of II monl!llU)_'choracrer:'
licGllc""'-' rherelore, define: ion.,ion in terms of a conunuous nse In price s.
hIJ.1M
detinc$ "inllltion as a S115111i,! rise" in prices. Brooman defines il as
... CCIIIIinuifts increase in Ihe
price tevel.:" Shapiro also-defines inOlllion

ge;~,:w

ID similllr vein "15 a persistm: and appruiable rise in the general level of
prien .... Dember, and McDougall are more explicil when they write thlU"Ihe
fIImI UJually refers to a cOnllnuing rise in pficas as measured by an index such
.. rile consumer pricc index (CPl) or by the implicil price deflator Cor gross
1JIIIi0dll ptDduct."

However. il is essenlial 10undersrand thaI a sustained rise in prices may be of

....-ious rru,nillldcs. Accordingly. differenl names have been given 10 inflation
ape ,tding upon Ihe rare of nse in prices.
I. ~p/IIg IlIjlarion. When the rise in prices is very slow like thar of II snail
or ~,
;1 is called creeping innalion. In terms of speed, a susrained rise in
pticee of annual incrwe of less Ihan 3 per cent per annum is characterised as
Qr:cpiDl inIlMion. Such an increase in prices is regarded safe and essential for
economic: growth,

''fIr

~nohqitNr

.. MQMIIl'1'TMy.

H.ryw Jobo lOA, up. nI .. p.IIU.

1970.

1itIwanJ s~

cu. p. 215.
"fl. cit, p. '~2
lIP 218

,"~'""",""cs,

10

FIG. 31.1

curve C shows creeping innation When within a period of left yars the priDe
level.has. been shown (0 have risen by about 30 per cent. 1be cu~ W "'/ttl
walking 100a,lIon when the price rose by more than SO per cent cluriq .. ,....
The curve R 11Iu~trates runnmg inflation show;ng a rise of about \00 per
ten years. The $ICCp curve H shows the path of hypenntlatiOll whell pac._
by more than 120 per cent in less than one year.

CIIM"

F.s, BIOIIIIJIn, ...

..

. IrIllllJlfUU

NQIIIltuY

Time in Yars

2. WoI.tiJv or Trotring Infoztion. When prices rise modemlely and the annual
H.ry G. J"".."., Sun."
,~-,

THE INFLA nONo\RY GAP

In his pamphlet How,lo Pallor Iht War published in

\940. ~

'~:':~~":2~'1

hll.""1

dIf'(alIlI'OIII
annallon Ih'c
""_".
he.-d wid! on
Undcn:mploymc~

III

........
~~~~~~!~~~j~~:~~.
.

Jap as
an Ole",.
or
'-'Iualion
or !~II

pn:-lnnallOO or ba,'C l'ricti

'9U1iii;';-"'n.e .nl1a1l0Ml')' PI' is die AlJll)Unlby which ~Ple
oucpul

outpul It lhe full o:mploymenl le.el O(

m.1Jnly due 10 IOcr~
n
1IIQftey. Jlven die level
(ull cmploymcnL !S9:
On the
bIIId. ascribed It 10 lhe eAce5i of c;,A_pc:ndiIUl'l:
o,er 1!!C~_al lhe full
_,Dietl!
Jij\'eI i1IC IatP-lhe4B~gal': c'-Fitun:.
the larger the ~Jl-alid
rlIfIld ~ Inlbtloo Grvcn .. ~ns(aniDvcrllge proPCllS'lY 10 SlI\'C. nsiog
dIIIIlD)' fll&Zes .,
employmenl 'c,'d ,,'ould lead 10 an excess o( demand
-1UJIIIfY aud to I COOfC'Quenl innalinnary gap. Thu> Keynes used the concept
oldie QlllaliOllar), PI' I'D $how lhe main dclerminanlS thnl cause :m mll31ionary
_...

"

e.lCI

itii"."1I'J or

F_

.,.rePIC

k:aI CCOamiiI,tfcxplalned .nnllion as

0'

e.

Kin

~d~~

The 'oO.lIonary gap

.s explained

.g

cxnmplc:
IS R:. 200 crores. or

with the hell' of rhe fo.llowm

lit pn:-inllallon prices

Suppose the: gross nationnll'rodu"

dlb Rs 80 c:mres 'S sPCOI by the Go,'emment. ThU5 Rs I:!O (Rs 2DO-80) crore,
_."
of oU1pU1 ~ available to the puhlic ((If con~u.mption al prc-inl1alion prices,
BuI.he &rou nalional inCome HI current priGc.' 41 full employment level IS R~
250 crores. Suppose the g['I\'crnmcnl 14Xes away Rs 60 crores, leaving R~ 19C1
aDf'C5 as di5posablc.income, nlU~Rs 190 erorcs is [he amoun[ 10 be speru on [he
aniJ4ble. outpul W(lrth Rs 120 CI'OleS, [hereby creating an inflauonary gnp ot Rs
10

cram

ThiJi. mOationary gap model is illustrated

II.>

under:

I an... N... Ofto>llnCOOl<

II CUR.'" prJ>
2 Tlllu
Ol'lP

&I

pn:.intbl,Oft

pnctJ

,. (jo... ,..... ' aJ'l'lldlIUrt

6 Ourpuf ",bltlt
lan.uotlll) PI'

(Of

COIlSJIfIIPUO"

((Ian U)

III prc.WWIOll

pnces

R< 2~OC.
Rs MCr

.Rs 190 Ct

=
=

Rs 100 C,
Rs 80 C,
Rs 120 C,

..

Rs 70 CI

III reaIilY. dlc entire drsposable IIlcome of Rs 190 erores is nOI spen; and a
put 01" 15 uved. If. say, 2D per cent (Rs 38 cores) of il is saved, Ihen Rs 152
CI'CJIa fRs I9G-Rs 38 cron:s) would be left (0 creale demand for goods worth Rs
l20aores ThU51he actual innationary gap would be Rs 32 (R) 152-120) crore~

Inste.ld of Rs 70 crorrs.

The innauooary {;4lJl is shown dlagr.munalieally in Figure 31 2 where l'f is

rile full empJoyrnwt Je\'eI of income, 45 per oem line represents aggregate
...,."y AS' and C+I+G line Ihe delired level of consumption, Invesllllent lind
:,blt'elllnJCnl expendIture (or qgregllll! demand CUrve), The ccon[)rny'~ aggre-

How Cll~ the inOatlonary gap be wiped out?

The 100allonary . gap can be wined
.
F, oul bv .IIIQ'Uloe -m s&YIDIS
s.o !hal die
aggrcg.,U: dernund I~ reduced 'BUI Ihi~ may Ic:aO to denali 0IlaIl ~.10 mI1d\ die
. Anolher soluuon i~10 raise the value
_ _ of il,V8I."._",IJD c OUll!llt
dlSP2snblc Income As aggregale demand inct'C<I.)e$,busi~men
.I&e-_
p
lahour 10 expand ~.
OUlput
But there bcm ~ full emplo ymcnl :\1 .L_
h
ut<; ~m
money
wage, t h ey 0 ff er "Ig er money wages to induce more worUn 10 .....ork Cor~
A~ Ihere. I~ ~lready
lull employmem, the Increase In mone y wages 1_
,..
~ .... 10
proporllOnale
nse In prices, Moreover, OUIPUI CllIInOl be Increased duriA& die
)hort run bec:ll~se fac~on. are already rully. employed. So Ihe inOalionacy pp all
be closed by
laxes and reduCln!..ex""nd~
I.....CD
ed increasmg
- d
'l':"
, Mo""'.'"
._-,
PO-,
nIso be us
10 ecrease the money ~Iock 'BUI Keynes .....
as not in favour 0{
monetary measures to centro! inOatil'nary pressures within the CCOllOlD)'
Its Criticisms
The concept oC innalionOU)' gap has been enucised by Friedman'. KoupmII\i',
Salanl'Q and other economists,
I. The analysl) of innllIlonJIf)' gap I~ based on Ihe assutnptioo \bat IW\
employment priccS IifC neAtble upwlUd, In other wOflis. they IClpond lO ClC'U:'"
demand in the markel for goods. h also lISSumes that money wt&U - ~
when pnees are riSing, bUI the shart: 01 profits In GNP io.."tU5C5 So this em" ..
is lelaled 10 t.).cC$s-<!elt\llnd Int1!lUon in .....hich Ihtfe 1Sprofit inf\aliOD. lbis'"
M fncdIlWl., '{)il(IMIOn or lbe IntllUon 01 lie Oop," ,\. R. Vol ll. 1.. 1 T ':()(IpmalIl. ~Thc Il)namin of Inn.II011," 1tf.S VDl 206,19U
I. W Snllllll
innalll)llal)' 0111'Mr.... DI tnd S~
IvrPolic'f ,en",

"n,e

IqH

~Ua.

'ftL1a.

~=::

COII~
MlIIIICI.am hither pnIftIIl.
III luch ftrmI. ...,. ......
18 "l
Hili an CO:llAOm)'in whlch.o called "":al:I:I:iid::::::~
tile pos&lbililYthaI these pnc:a may be idn: :
~tlon
iii dII

_~,III!".

byllllioll5 and pmfil

new phenOlllellon
was ~ed in !he 19.50s
CIIIIII of 1allati0lL II also came 10 be
lII'''arioa is Cllrsrd bypv.pv:h"ll!d

catCI

Ib'"

nat

1'.

III ,,,clnpl 10 earn greater profib. To the cxtcIII

II
profll.push ,"nation will result" "~rof"--pusll1aftIItIoft
It r ....
.,drIIinlslcrcd:prtce d~ory of InllUion or price-push .,.
At
or rnarket-power mnlllonl
But there are certain I~Ulliolilo on the power of &ala .. nIIa ..... tiIiIii:.
'Oley c:lnnot raise Iheir selling pn~ 10 increuc dIIIr ......
lW lilt
delllllnd (or tbeir products is stable. Mon:over. fnms ..
m~ 10" PI b
their profits every ume unions are successful in raisiq ow....
11iaa " J n
profits of 11lim. depend nOIonl)' on price but on sales
......
the [auer depend in part on prices charged." So iifin' c
tbIir " ...
beCause their motives are different from unions: Lastly. piolila ...
.., a
small fraclion 01 the price of the product lind a once--forall illiCl e in pt.-it
nOI likely 10 have much lmpact on prices. Eecnorn.sts, tbcn:fore, do DIll ....
much importance to profu-push lnflauon as an cltplanallOD of COIt-pulb ....
lion.~
Cost.pu~h inflation is illustrated in Figure 31.6 (A) and (8). Fmt ell .....
panel (8) of the figure where supply curves 5.S and 51S are $hown II iDcraIl",
Iunct ions of the price level up 10 full employment level or inc:ome Y.. Given ..
demund condiuons as represented by the demand curve D. the supply turve So
Is shown 10 shill IU S, in response 10 cost-increasing pressures uf oUaoPo\ies.
unions. etc. a~ a result of rise in money wages. Consequently, the equilibrium
position shifls from E to E, reflecting rise in Ihe price level [rom P to P,_
&11
in output, employment and income from Yf to Y, level.
Now consider the upper Panel (A) of the figure. As the price level riles.1be
LM curve shifts 10 the teft to Ut. position because with the inaease. in \be price
level to PI the real value uf the money supply falls. Similarly. the IS curve sbifts
10 the left to IS. position because with the increase 10 the price lem the dt,.......
for consumer goods falls due to the Pigou effect. Accordingly. the c:qui1ibriwa
position of the economy shifts from E to E, where the interest rile ;Ii
:
from R to RI and the output, employment and income levels fall tom Ibo till
employment level of )', to )'.'
The cost-push theory has been criucised on three issues. Yin\,
inflation is associated with unemployment. So the monetary au!~
because 10 control inflation it Will have to tolerate unemp~
~ .......
government IS committed 10 a policy ot [ull emplo)mem. it wiD

ta..

,roc"

wage increases hy unions, and hence inflation. Lastly. iJ tbc ""tid

DDIANDofULLaa __
l

common type of Inllllioa.

b ....
(l)cmInd.pulltnn..ta.
or!~~~~:=:a!

~,:::~:=It

lhe
aV.dlahlc supply of jiiOcb is Nt "III .....
eilhef bcc.DIIK rC6OUl.. _ fqlly ..... a
.dl......
rapl y 10 mec:1

... crilicdcd Keynes for applyi", the mulliplic:r technique 10 a

IlIUarian. Accordin, to him. the multiplier lechnique is nOl
01 full employmenl and intlalion. II abstracts (rom changes
0( income. In a (ull employmenl situation, Ihe share of nne
__
.. die IIIIionaI 0II1pIIf CMI only be inCreased al the expense of anOlher,"
, A.....
waknes$ of !he innationary-gap analysis is rhar il is related 10
...
1115.suc:h u ~nl
income. expendilure. ~"n,umfllon. and r.aving
.. lief, .. inc:reue in prices al the full employment level I~ nOI confined to
.....
01 current goods alone. Bul the.)' also affect the prices of goods already
#'II' "II Funhcr. the di5posable income which is the difference belweeo
I:IIIftIU bIoome and lUes. may 'nclude idle balances (rom the income of pre vi-#GJuds

,.~

callU. rIJese crirkisms

conCepl of Inllalionary gap has proved to be of

.",
Importance in elplaining rising prices al (ull employment level and pollcy
uns ia c:otIfIOlUn, Innation,
It lId& ... dJe rise in prices. once the level of full employment is attained. is
...
to eacess drmaad genera led by increased expenditures. But the outpur
QIIW be ilIcreased because 1111 resources are (ully employed in Ihe economy.
Dtfa ,.. to inllation. The larger the expendilure, the larger the gap and more
the

....

die inIIation,
As a policy measure. it 5UUesu reduction in aggregale demand to eonuol
fWh!"m For this. !be beft c:ourse is to have a surplus budget by raising taxes. It
fil.,..". uVin, incentives to reduce consumption expenditure. "The analy-

fII die lnIJarionary pp in

Ictms of such aggregates

as national income.
ourlayr> and COIIIWnplion expenditures clearly reveals what detergubljc policy with IeJpect 10 lUes. public cxpendilures. savIngs cam-

~.r-

,_ or

u,", ltIcn:asilll.
,1. AI Aqll, , ....
,IIN.
response to slw..ion of1aa described " "'lao --a. .,.,......... &;
good.")
_.
8',,,

There:

'I_~

are two prineipallhcQria IIb!Iul tile do n e.,uq W

moneillfuts, and !be KcYlIC$lans.We ibaJl also dl..,. tllltill ..........
by the Dant!h economist.. Bent ManICII

[1. Monetarist VleW!lr MO!ICtary TheorJ or .........

The nlOnclllfisl$ cmphuise

the role 01 ITIOII&IJ

1IIe pdlllijii1 ....

1Il

demand-pu)] inllation, They ccntend Ihal inflation ~ ai_a,. a ..,..,,_.

..
nomcnon, Its earhc51 ~pliinalioo is 10 be found In tbt simple quItIdty...,4
money, The rnoneranus employ the familiar idelllity of PiIber', &1 liar of
Exchange;
MV=PQ
where ~fis the money ~upply. Vis lhe velocity of IDODCJ. P is die _
.....
and Q IS the le ve I of real output.
\t\ssuming V lind Q as constanl. lhe price level (P) 'VVic:s pi""",'"
.., ..
the supply of money (M). With Ilexible "''ages. the CI:OIIDIDJ' ...
operate al full employment level. The labour fOtU, the capbal .......
technology also changed only slowly over time; ~.
\be
, ..
money spent did not llfTect Ibc level ofru1 o.
!to
'''JAN: ar,..

b,a .".

quantity or money would result simply in doubling IbDprice

UIlil .....
had risen by this proporuon, iodi\'iduah lAd firms woaklla __
.-.,
which they would spend. leading to rise in priceS. So
IlOCIIII'
same rate al which the money $Upp\y expands.\!_n Ibb ..,.
supply IS assumed to be flXcd and lhCtt is always full
economy. Naturally. When the mone)' supply UaCUC$ it a t
for goods bu~ lhe supply or goods canl\()( be iw led due "' ..
rncnt of re!ti'utte), This lead:; 10 rise in prices. But in \I
prolonged rise Anthe molley .supply ~ will ~w_Jua,.

""'1Iim

die: _._

_~_'''l'

K K l(utlilDJ1l Af()tl(w,..,' TIlrot\' _, P... 1ir Ptil!cy, p -\S,

II IIIl11~n. MIN,., ~1f"Y I; '~'" ISDOlto be an- __

II

......

't=~j~

-- wttIeb
MIa
ftnnI. die
PlI"IIII
~.""""

redUCtiOn In their 1IU,111Ieii.

~tlilillI\
wIIO pannli wIIIC
1_
above tile
Ia iiddItfoIIlO budlll:$S income lQ.
f1Itl...
IIII ......... polIcIeS. One of the Import pianka of
.... __ IaCUISI or money wqes 10 prncluc:tivtty
of (Di Are of money .....aaes should be: limitc:d 10 Ibt
_.1M1I;y I.... easc' FIII1hcr. poces should be: reduced in those
IIIowe roctaF puduclh'IIY growth. On Ihe other hand. pri~
,
Iriea where productivilY i~",creasing less than !he

Inc:'_

..

=:::!~.:.
......

iiI- .,.

,. die

Prices should be kepi slAble in indu'lriC$ where prncluctiv_

the nalJOIIII' ."crule rste. BUI ~uch policies are dirticull to

o( .an open country. If import pri~'eS of food and Other
nse, lhey tend to raise the domeslic price level. This makes

c:ase

:aIr (Or anions '0 stick 10 wage agreements

",~r.. IfJc best policy measure is 10 reduce personal and business llIXes
....

itdley tend 10 reduce 'abour costs and raise demand for labour. Similarly.
be reduced in order 10 prevent rhe price level
Ian risill,l. To encourage SUIte and local government 10 reduce Stale and local
.... Md Cllcise !Alles. 'he central government should sanction additional grams-

..... _ iIId excise dullC5 should

iJHld

10 them.
10 combar

Thus

stagnotlon.

:J

vas: spectrum of polrcy measures is needed.

[CAVSESOFl1\'FLATION]

./

./

'[!allali()n is caused when 'he aggregale demand exceeds the aggregate supply or
Joods and services. We: analyse 'he (actors which lead to increase in demand
and the shonage o( supply
FKIOn- Meeting

Demand
BOlh Keynesians and monetarists believe thaI inflation is caused by increase
in !he aggregale demand. They point towards the following factors which raise
il.

I. lncrease in MVlle), Supply. lnllation is caused by an increase in the supply

of money which leads

increase In aggregatc demand. The higher the growth

of the nominal money supply. the higher is the rate of inflation. Modem
10

qrwtlilY theorists do nOI believe rhat true inflation starts alter the full employ-

-Ina or the
) I~

pea."PabUe ,.~.

III
Inl rru:h wid! the .-11
al phenomenal nae. ddlI:nobllw'
...
l ......
Qoyernmenll of botII deVeloped IDIl ..
facililiC5 und publk utillliCs IftII sodII
tries IIlld Wltin, public cntapriJea w1dI
Aggrelale demand.
4. tnereas in CONI""'" SpttGut,. 'tile
mcreases when c()n~umcr expenditure hILIII"
due 10conspicuoes c:onsumplion or
"01. '.
more when Ihe)' are IPven credit f.anlies 10 buy &oad& ..
instalmenl hlUis.
S. Chrllp Monrltlry Policy. Cheap moncIarY policy CIf - ....
c~p3n"on also leads 10 increase in the. money supply wbIds
for goods lind services In the economy, When CRdilexpandl. 'UI__
income or lhe borrowers which, in urrn, nUlIQ aggRPIC ,,-_d,i
supply. thereby Ic.,dmg 10 inI131;on.This is also known a~~~
lion .
6. Dejiclr FillClIIcfIIl1. In order 10 mC:C1 its mounting ~peIISC$.lhe .. ,.,
resort ... 10 deficit linnn.;ing by bOfTOwlng {rom Ute public aNi eveo by
more notes This raises aggregate demand in rela.tion to a~
thereby leading 10 innationary rise in prices. This is lIlso Imown
;m/uctJ lnllatlon.
7 Expansion of IIII!Private Sector. The e1\p3.ll1ian (If the pn"
lends 10 raise th~ a~regale deman,!l. For huge investments ioause
and mcorne, therehy creating more demand for goods aNi !IefViI:ea.
lime for the OUlput 10 enter the market.
8 Stuck MOIIt!V The existence of blade money III all COIiIlltl . ~
corruption. tax evasion tIC increases Ute aggregate: demand. PeopII ...
ct
unearned muncy Cl(\ra\a.ganlly. thereby creating unna."CSsary .,.,,-'"
moduics. Thi~ lends to raise the price level furtha.
9 Rapo\mtlll of Puf>lic Debr. Whenever the gOYetnmCDl l'IIIlQIllII..-

HlMa

~:6~:!

"1

internal debt 10 the public, it leads to increase in the IIlDQeY .....,

This tends 10 raise the aggregate: demand for &oocb ... ~..
10. increase ill Exports When the demand for ~1lcI1ly
pmtllijiil1
increases in foreign coumries, thh raises the eaminas of tnd.....
:

public.

..~.
I::
n""~,,
CiDnunodw.. ~

\!actor.

AIf ...

111_ mllllIIOIW doml", rtIr ~

lIIId.... ~

.".,

~
IN _ CI!I'IaIa fKIon which optnIC oa lhe opposile s.de and lend 1(1
redUce !he .....
Ie <Upply. Socne of die fao:tono IIC ~ (ollows:
.
I. ~
", FIICIIH. ", I'rodJKriott. One of the impo<1Anl<au"" .rftelln,
the l1IppIlIa or IIJOd> b die sIIcInqC of sudl fl<llln as labour, raw malcrUh,
POwer suppI". apllal etc They Ie8d 10w:ess at'IClty and ",duclioll on ind",.
llial pnIducIIon,
1. ItwhuIriDJ DU",r.,J In countries ..~
ttad< unions are powerful, !hey
also help In cunallIn, produello. Trade "nions reson 10 ,!likes and if lhey
heppen 10 be untea$(Inabl~ from Ihc: ~mployet'>' vi<""I"'.nl 3nd are prolonged.
they toea: Ihc employen 10 de.:~ lock-O'llB. In boIh ClIS"' ndusln31 prodoc,
110ft I'all Ibcrcby reduanr. supplies ot go""" U Ihc U01('n< succeed In raISing
_"
..-qcs of lhe" membcn 10 .. very high lC\cl Ih3n the produ<lh'lly of
LIbour. litis also lend, 10 reduce proclUCIlQD and $UJ'I1hcsof goods,
3 NIJtIITGIC,,/mn'hn Droughl or tloods l' rOCIOr which adve,>cly olfe,L,
die supplies of .,neullu,," products. The Llllet", in rum. creal. shonngc' of food
products and raw nwen.ls. lhcf1'b)' helping inOalion3l') pressures
4. AniJicral Scarciues. Anilicilli scan:i"~ arc..-rutcd hy hoarders and 'rec"
laIOn who Indul,c In bIlK): marketing, ThU!> Ihcy are iMlrum.mal in reducing
supplies of goods and railIng melr prices.
5. 11U"f!{J.S~ in E.qIOI" When lbe country I'.odu~.'more goods 'ur expon
Ihan (0' do~lic: eoesumpuon. this creates shortnges <if goods in Ihe dOIl1C:Mic
market. Thi, le;l<!.- 10 infl"lion in the economy.
6. Lop,"d~cI Produrtum If the .IJ'eSS " on the production 01 com Ian
IUlurio:s. or il.uIC products to the neglect of essenllal eon,uml!t ~(l(lds In the
country, Ihl' creates shortages of consumer goods. This again Cllu>es InnMitln.
7. Lu ... 0/ D.m'nls/,ing R~IUmJ. Jf industries on the couru.ry are u"ng old
machlllC$ and vuunoded melhoo.. of production, Ihe 11\00(If diminishlllil relurns
openles. Th,,, raISes CV!l1per unil of production. therehy I'1II~IIIg Ih. rric~ 01

DM-.r,H
MIlftCIary a

"~Ct\"'C

Mue of

etfeeuve measure

rllCUln.J

~
QII

1
oaIy _

biiilfi

nol~

and there " bypc:rinflaIioa In Ihe

coli"".

Bul.5 lI,.,qulLlblc: for ;1$ bum Ihc 5IDIIIIdq,osillllll1l

[2. fiscal lI.Iu.'Ure5

MOnCI.:II)' polky alone: 1\ Incapable of cOlUtOlllna iIIllatiocL lllllll_"
rOI e. he ~uJ1pl.",cnlcd by Ih,~1
~ure$.[!:tSc:al _
In:
for conlrt>lIing Ilovc:mmcnl cxpenditure. pcnon;al COIISlunph011 CIl
pn val. "nd public in"C'<lmcnl. The priDcipal fiW2l
_
(u) R(durlinn ell Unnrc~~u? ~"'~'
The pu_ .~
unlle~c~~...y CAt'(ndilW'C on non-de''elopmcnl actt\'itaes III nnW ..
11011 Thl~ Will al.'o pullI~bcck
01\ pm ale clI.pcndibIR wblch1s411f1111i1
&ov~rnRlC!nllklllMolJ (I)I too.h and SClvico, 8ul It i\ DOl
c\pcI><lilUIC Though C\'Onomy 1'I'lCaSUR$ In: alwa~ 'Weln
difficult m dl>llIlgul\h belwttn ,",$Clltial UII1 non-cuc:a&ill
rOle. lIli' mc:uun:: ~hould be \uppktnaI\ed by laUbOlL
(h) ,/IIClrOSt UI TuuJ To!:,,1 pcrsonal COIIiun,.iu\ QI
1Ii
pm(lnlll. Ct"1'OtUc lIIId (ommodil) IA1C$ ihouId be niIed
\houlJ be It\u:d. bUI the raI~ of lUes 1ohouIt111C1lbit
~3"m.tn'C~llUCnl and ",oduction. RaIba.1he IU lJI_l!

cas,

II country]

TO CQ."I'ROL

_.'

(I'l Dtmfjl/tIIJaliofl of Currcncy. Howe""" .- of __

.,,,
10 dcmcncnse c"nency of hllber ~.
SIIdI
oJ0Pled when lha. h ahund.tnce 01 bl.a IIIOIIC)' m ilia CGI:II:..n~'
" (0) lUll< tJf Nrw C.rrtCIIC)' The rtIO$\ auane rlD'd." 1IioI....
~
01 new currency in pla<:e (lIthe aid cu~.
Under dill .,.,...
Is e<ch"n~ed rOt number or nelCC) of the old cUIIaICJ '1110
"op''''I' l~ul\D r.l<cd accordlngl)' Such a measure 11; ~

Fot:t"'J. In modem lim~. innallun Is u worldwlue pheno'

When pnccs nse III nujl)r Indusrrial a>unlric:~. Iheir trrecl~ ~rread 10
allDil all counlIio:s Wllh which Ihey have lJade rdauons. Ollen Ihe me III Ihe
price of II ba>,C raw malenal like ptltOl in 1Ile:inremOllion31 market ICllds 10 "'C

JUI.s

0- or

Inn.1I0n due 10 dcmand-I"'II

8 InI~molionoJ

JlIRASU

........

poUt') The ccnnI bulk at tIil_iW

Ihc: quantil)' IDd qualJt)' oI ...... 1'or
secunues In the open muta. 1lII_
...,lccl"e credil conli1jnji3iuiii:~
,cBur.~n,
coro_ cndIt
MonaM) por..:y may IlOl be cffccthe III
due 10 cO>I'P!'sb flClOo, MOftdlU}' policy

menon

in

(a) Crtdll ~.

products,

in lhe price of all relo1led commodllics

INfl.,,\T10S

We h~,,:5!udied "bovl' Ih,1 ,""muon 11CAUsedby Ihe failure of .W~i!dl~ luppl)

<

"

....

conuol dds,

boaus. lie BIIt

by~__".,

.11....

.......

link Increase ill ,....

~_
II wiD COIIIrOI WIll IIId
production or &oodIiII ilia _
(c) Pric~ COIIIroL Price

...

.-ar&iiil.~

control 10 check illflallon. PriaI ~_.

pnees of CSICI1lial consumer aaOdL
and anybody ehltlina more die
difficult 10 IIdmini5lcr price cootroL

JII"F.

~~!::t:::=

(til Ralionin,. Ralloning alma It

as to make them available 10 IIrp IItIIIIbef of
essenlial eonsumer goods such wbeII. rice. ......

' 1III!I

meant 10 stabilise the price5 of necesaria IIIIIl Msum

is very inconvenienl for consumcB
i\ lads
ages. corruption and black markellng. Keynes did IIGl favilllK,j
"involves a great deal of waste. both of n:&OUI'CC5 mel
Conclusion. From the various monelary. fisa! and
above, il becomes clear thaI 10control infiatiOl1.!he RCnICnlIl
measures simultaneously. Inflation is like hydrab.t bel
he fought hy using withe: weapons at !he COIIIIIWIIl or die

"""""'Sf'

EFFECTS OP INFLATION"
110

a,pes

of meuuta lie diose which aim ar increasing

.....
dlll agrepCC demand dircclJy.

aggregate

T~_RIr:IuPI'fIlIMawI. 1bc (ollowing measures should be adopted to

",
0: (.) One 01 dJc foremost measures 10 control inflation is to
IfJllUClluction oIal
<,I consumer goods like food, clothing, keroI~'".......
Ic ajlf. ICI:. (li) H Ihcte is need, raw materials for such
~
be fmponcd 011 jicieDdaI basis 10 increase the production of
IJfII_.Iitlc. (iiI)
IIso be made to increase productivity.
WlUCriiaip~t_1IUId be mainlained through agreements with
~""III to IIriba for some time. (ill) The policy
illdillltiriei
be Idopfed as a long-term measure.
--JfOcIuc:d0n of industries through the
All poaible bcJp in the form of lerest

_lei

affects different people differently. This is bee ..

value of money. When price nses or the value of IIIOI11tJ
the society gain. some lose and some SIaIId in betwoea.
are Iwo economic puups in every society. the I'lllila
flexible income jIOUp. People belonging to
belonging to the second
teISOn
the case of differcnt
assets. esc. III'IIc.
inflation, most prices IR rising. but the ra&es
differ much. Prices of some goods and services
of ,still others remain unchanJccl. We disc:uss
. rcdislribulion of iac:omc Ind wcalIb. prciduc:ti
Inflation

I:~~:
~
WI_........
talidWI'" _

iII&:OIftI!S Mr

...
__

_1_'.

_1IIij1lii

pNIIIN
,.) FiW

relJdvtlly ncslble.

.iIe.Wtr

saJutes

II! rtIe. 1bey

In:

IJewrIlC

more
more

~1;'Iii_1rUI111b. tnders. lUI ~wc

iWrMle

pin durin!! rISing pnees

_!WI.H.!he
cost of !he Connergroup There
'fMj~1 Mill welJlh from !he poor 10 lhe nch. A~ a fe'lUll
lad ..... III COIISfIicUOUS c()fmJmplion. whil~ the poor
iIiCOil'"

iI!fOcC IiIbaY and poverty

or society ,alns or lose1i from inn.ullIn depends nn

and who docs nOI. Those who c:cm:.:t1y anllcipale

M...1hdr

presenl camlngs. buy in!!. tKlrrowin);, and lending

... 11:.,01 IIJcOmCIIUId wcalill due 10 Innation, Th~y.lhcrdorc.
~t\"fl~ulo'n:
Failure 10 IInlitapale innalion correctly leads 10
'IIc:ClGlIO and wealth. In pracuce, all persons are unahle lu
diG nrc of innDlion correctly so lhat they cannOl adJU!f1
6illllv'bll' lICCQrdingly A.~" result, some persons gain while
ruuk Is II rediSrribUUllll of income and wealth The effects
puupi 01 sOCiety are discussed below
., .... '.C.,.ruD,rJ DurinJ period) of ri~ing pricCS'.4_eblors gain und
.. JRI.JJric:o rise die value of money falls. Though dcbiors return
oImoncy. bII' thtIy pay Iece;s in terms of goods and services

dIuc 0( money is len chan when they borrowed

'" Ibe ddIe is reduced and debtors gain. On the
they l!d back the ~;une amoum of moncy
..... JnI cerms because the value of money

MI_.

t.-.~
f~_.~
..,

....

the money
other hand
which they
falls Thus

of real wealth in favour of debtors Ilt the

such ItS clerks. leachcf'> '1nd other
IbIn is intl.lIon 11M: reason is lh;JI thetr salaries

pnca~

"'1111)' pin Of lose depeoding upon Ihe speed

10 riIIIII prius. If their unIOns olrc ,Iron!!. Ihey

_

...

__

0(

lIVUlJ Index In thi)

W.I),.

Ihc)' may be

lhe

valueuf

:::m:r:s~IU~t.:I~

mane)' ......

-;.::~Ii::~
::=~

ro:ll'lcnl\ ollnlntofa- P
.. :':'
d.as< 10 the upper UlCome poup.
I;I\)U('\lowilld, the middk 1_111"'-.-

(S 1 EqUIe) Hold"n (I' 1_JtDf1 "" ....

DIes g"'" dunng mf\a1loo For wbc1I pnea
whICh mm;u<; I'ror'l~ of rompania
M proftI5 .-

ai'" mcrease III m IIL\II:( rIIt than prteD BUlIbole

securines, bond . CIC. INhich CiU1')' I rlXCMS --,
hccause they receive II filLed ,um while the purdY.,jptl
(6) BlLIlIItJlman. BUIII1l:l;S
of all IWC'. IUd! -estate h\)ldcr~ gam during pcr1l1ds of nsinl prl(CL
pli~ arc nsmg, the value of Ihelr invenlOric:$ (padl iIlti!l!.
pI,.partion. So they proftl more wben !hey KIldldr
same IS the ClISC with UadCfli in the ,hon (111\. Sal
another Wll) . Their costs do nol rise CDtbe CXIel\l 01_ ifM~;
gcods "'IS is because pnces or I1IW rnaICriah _
i.....
rise IInmediately 10 the: level of the poee rise:.
profll during innation because the poces of ,,...,.., pIIOIlII!
Iuster Ihan the: general pnce level.
(7) Agnrulnmstr. A&n'ulIUM~ an: of dIRe 'WCIo
etors, and landl(M IlJricullurai
because they gel flACdren~. BUlpeeanl pRJ",IIUIIIS'_~"~

"_at

llIe'"

won.en.. ~

(IIrms g.un I'n.:cs 01 farm prodIIcb 1I1U~ ~

rill pnces 01 rnpuli aDd \ADd ,evau: do _ ..
In

pn1duc:U. 011 me CIIber ..

Iuvd by NiDI priea. 1bair

Ihc prices 01 Ivm

wUlkels ore hll

uwne~. !lAu5C u1Ide lII\ioaum 15
~UI1lCf

Coods rue npidly So ,

' .-

_.-.

1II1II".
,

the ....
(6)

dcdleD

becII"II".
1dWi"'j

~"Ion

k WI" CId.

RecIoIaId __
(7)

HinM" f'6n{p

lX.:au", lhe nSlnl

leu pft,fjlabk

COIiU

e ,.."
trl

a.piIIyY!::~:1

1111 fit(O",a~. S~
prnducen "'00 Indwce In tfICClIIHlliw:
In,Ioad 01 cnllDI!HnILthcmJclVC5 111PiodiiCJl ..
l'U' lytle' "I (4'" matcnlh
lCqllualln Piod"d'm,

3. Other Elfffts
InOalllln 1e..1h

ttl

numba

01 olbc1 ctfccli wbicIl_1III

InnaliDO .ure&;U the aova''111111l

the CU\'~rnmenl in I1nJ1nclO I~ ICtivllu:~ Ibrou&'l iMi~
monev Income of Ihe peoplc 1tu:rCUC4. BO'vt:rmll_"CIC_
(.1)(10'on incomes and comll\{,dilies So the mlCftllllil'oI'", .. _
durin)!, rmnt: price.\ Moreover. !he real burdca or ...
111GO\'~mll1~nl

ddIII produellon

Is tnCOU1'lIged I'rl'ldu= earn wind- fall

1hey iJlvesl mote in IlI1tlclpation
higher profitJ. '" the:
to
emplo)'rru:tlL production and Income H.uI lhi' I~
ID file ftIIJ emplO)'lTlCnl level. Funller merease rn IDVc:,lmenl
.. lad CO~
Inna!ionary pressures within Ihe ec 'nom)'
_
dIIn production as the lUourcc~ nrc fully employed. So
deb producIlon llfIer lite level of lull employmenl The

or

mcreuc

IIjblllllklll on JlfOCfuc1ion iII'C disc;usscd below

__
/lntHlruJ lnnllulln C.lUSCS mi$atlOtJliol1 ef resources
...,
raourca
from the prodU~ljon (If e"collatlo
non-essenhigher pcufils

....

IIIoy ""...,

,.

S,..". <1/ Transa uons Inn ..uon leouls

10

dw.n.'c\ rn

...
of ,.Cllt4M cu They hoW II ,nu.lltf \loCk of rc:ll money
.... IIiI*... COIIIJJ1IL'nclC:~Ih.1I befort' Thq dC"I~ mere lime
.eII""'1I lIIOIIey 1010 to \ entmir~ or tJlbc:t flO ancial or real

_ ..... lIdeDeIlY

Ill( producuon

iIC diverted from

of

gaud,

IIiIUUIC* II'r used '" asu:lully

1ntIaI.i0ll oIdlicriCly ilfltI,l
Ill<: VIlI!,J'Tl(' of (1ro
CbIIM fII ruin, Fica alonglAlilh rl\lOr ,., It of 11111111~

t."

JlJIt.~

in prlCQ

I.."1U1CA

..

srllcn. mllrlel In MRh

when prices are n~lng But the governl'llClll Cl.pcnl"

prodU~lIon costs of public proju and enterprises live

eltpcn~c.~

Il~pnces olnd wlIgCS

nse.

On

...,

.~

.. :

Ihc wbok..

under lI1f1nllon for n51ng wages and plofll5 spiced _ ....

'I

wuhm Ihe counl!)

l21 81lWtl{t of Pa)lIItnlJ Inflation in\o\ve.s!hl: _:ftliidlll,lIf
pI InternAUon:ll ~pec",li!.alion IUId diV1\ion of lllboal
bllallCc of pllylne"l~ (lr a cauntrj. When pnte5 fUll countr)' ,han III fotcign countries. dOtQe$lK pcodur:ts be

"'''''rJJ

caa-~

10 lorn!:" I'llldu&;1J;Thl~ lfmh 10 inc~

lmpom

1IIIl.....

maklnt! Ihe 1131:tncc:of payments unfa'OURbIe for \be CICIII"

onl~ when Ihc COlinit)' 1(1110"""10a filed uc:hM&C nIIC ,.,.,
1!Llvn""Imp~' on the balance of ra~ ,f \he. w ' ~ "

ex h.lnrc r"lt W,lcm

(1' f_'L hllli rl'
\11 flllL IITIl
(41

R<ltt

When

coumnes, illowen the excblllF

C,.llllpu (lJ rllt

brI-.~

rrica rise marc filii..,

f,fOUlD.rv

Sy~

1(

'*...
cel.lIII

~ii.~ia"'_JDl!8l_"lIIlbcm"1:,

Ps"

If_

... _,..-Ieers n:soft ID slrikcS whid1 tead 10 lois la

paopie resort 10 hoarding. blackmarketin&- adW-

by ~
:II 'II,.... .. o( sub$tlndard commodities, speculation etc Corruption
_....
iII every walt of life. All this reduces Ihe efficiency of the c:cono~.
,(6) 1'tIlJtieD.1. Rising pnces also encourage agitations and proteSI!; by pohtlcal
opposed to the government. And if they galher momenlum and become
..... ooy they may bring the downfall of the government. Man), governments

JIdies

have been sacrificed al the allar of inflation.

EXERCISES
I. 0"11 m cnlll:,'III.\scs~'ntlll

panl.:ulAr
thea".
2 Whut
1\ Infllllionary.gtJl'?

of nny one Ihell.,. of ',nl1ulloll and IVC reason.' 1,'1' <electlnE Ihis
Exa",in~

me

u<dulness of Ihls COllcePI III ~naly"";'

mIlmuon
:I 01$Ungul5h between d~m:lHd. (lull and costpush

mnillion

D prll\,C$~ of

How have the e 'WI) \'IC,",,5 on

UI1bIion beell rcconcilclP

4 "The distinction betwccn cosl-pu~1t and demlllld pull mflauon IS unwork.1ble, lneleV~'1I and
evea meaningless." Do )'ou agree WIth thiS VICW Give H..asons III suppon of your crwer
S DisCuSs the tlleury of structural IOfl;lIlon
mOlllO
n purely maneln!), nt purely non-monelll!}' or an Ir:;tiIUIlC'nal phc:;Jment

6 Is
In

the c:onICAl of a d,::,'cloped count!)'

7 DI'lCUSs the theory of the Phillips curve and bring OUI tis npp:m:nl j:::',ry I".,
8. How does !he PhillIps curve explam the trade-off betlloun une ~;:!oymcrl

D1~s
9
10
II
12.
13.

uon

115

' Wnte

.;.,nin.

and Inflatlt'1\ 1

poliCY ImphClllions.

Explain

phenomenon of SUlgfl3Uon Sugt;est measures 10 oonlJol II

Wb:II IS Inflation? Expliun II economic effet'lS on differenl people
DiscUSs tbe causes of Inf1:luon How can II be controlled?
Explllll Benl Han~n's Exce~~ Demand Infllllion Thtory
Wnre IlOItS on. Open and Suppre~std Innlllion: Marlcup l'l~I<ln;SUlgfu.:iC'r
lhe

SeclOnU Inn