Inflation:

Inflation is a process in which continuous increase in the general price level.

In the words Milton Friedman:

“Inflation is meant a steady and sustained rise in the prices.”

Inflation is an economic concern because it reduces the value of money and increases
the cost of purchasing goods and services.

Causes of inflation:
1. Demand-Pull inflation:
It is caused by excessive consumer demand for goods and services. This occurs when
consumers have plenty of savings, higher incomes, easy credit and low interest rates.

The high demand for goods and services produces an increase in prices as inventories
are depleted and production is increased.

2. Cost-Push inflation:
It is not caused by excessive consumer demand but by rising factor costs (land, labor,
capital) for companies.

The increase in factor costs is passed to consumers by increasing the selling price of
the good or service.

3. Increase in money wage rate:

When the cost of living goes up and the wages of workers also increases then money
wages and prices rises feed upon each other and result in the rise of price level.

4. Profits push inflation:

When a few powerful firms increase the profit margin the smaller firms also tend to mark
up their profit margin.

5. More Investment:

Investments also play an important role in producing inflation. At the moment of

investment the economy’s stock of wealth and money expands and it result is in
inflation.
 Slow Industrial Growth:
Our industrial sector is not at developed form due to use of backward
techniques of production. Its less production also creates shortage in market and
caused in inflation.

Remedies of inflation:
The main measures which are used to control inflation are:

1.     Monitory policy.
2.     Fiscal policy.
3.     Direct measures and other measures.

1.   Monitory policy:

Monitory policy is a policy that influences the economy through changes in money
supply and available credit. Monitory policy is adopted by central bank of country.
There are:
1.     Open market operations
2.     Variation in bank rates
3.     Credit rationing
4.     Varing reserve requirements.

2.   Fiscal policy:

Fiscal policy is the deliberate change in either government pending or taxes to simulate
or slow down the economy. It is the budgetary policy of government relating to taxes,
public expenses, public borrowing and deficit financing.

Fiscal policy is based upon demand management examples, raising or lowering the
level of aggregate demand by controlling various.
3.     Direct measures:

It means the step of government like rationing of goods and freezing of prices and
wages. The government can also increase voluntary savings of people by giving them
various incentives.

Other measure:

a.                 Increase in output:

The most effective method to control inflation is to increase the supply of goods. For this
purchase, industrial and agricultural output should be increased. However, Pakistan
performance in this regard in unsatisfactory.

b.                 Control of money supply:

Volume of credit and money supply should be control. This can be done if tight monitory
policy is followed. Decrease in money supply means less purchasing power with the
people.

c.                 No deficit financing:

Deficit financing should be disco tribute. The development expenses should be meat
through taxation, savings. Excessive issue of currency should not be used to meet
budget deficit.

d.                   Population control:

Measure should be adapted to decrees the rate of population growth. The campaign of
population planning has already started showing some success.

Deflation:
G.Thomas says that, “deflation is a reduction in the general price level due to
decrease in the economic activity of a nation”
Deflation is a general decline in prices, often caused by a reduction in the supply of
money or credit. Deflation can be caused also by a decrease in government, personal
or investment spending.

Causes of deflation:

1.                 Access production:
The production of goods and services in excess of its demand is a cause of deflation.
The price level comes down and the producers may not able to continue their output at
present level may make wrong calculation about future demand.

2.                 Security sales:
The sale of security is cause of deflation. The shares and debentures are sold in the
market. The people like to invest their idle money in shares. The purchasing power is
checked to the extent of investment in shares and debentures. They can buy loss goods
due to low expending capacity. The demand for goods is laver. The supply increases
the demand limits. The excess supply bring deflation in country.

3.                 Low profit:
The low rate of profit is caused deflation. There may be competition in economy. The
investment in any sector may be more than the demand. The tight competition lower the
rate of profit. The seller try to clear their stick of goods. But excess supply becomes a
problem, the business persons cut their profit to retain.

4.                 Less demand:
The decrease in demand is cause of deflation the demand may decrease due to
decrease in income, wage. The excess supply and less demand to a sat back to the
economic activity.
Remedies for Deflation:

Following are remedies to control deflation:

 If the central bank reduces the interest rate then commercial banks will also
advance the loans on low interest rate the investment and income increases.
Thus in results demand for capital goods increases.
 In order to increase the aggregate demand the government has to increase its
expenditures.
 People should start using their savings on consumer goods and savings.
 By printing the extra money through central bank government can control the
deflation.
 By encouraging the private sectors for investment through different immunities
like subsidies and tax reduction.

Stagflation:
The advanced countries of the world since 1960 are facing twin problem of rising prices
and unemployment. The term stagflation was coined to explain the co-existence of
inflation and unemployment.
In the words of Samuelson:
“Stagflation involves inflationary rise in prices and wages at the same time. The people
are unable to find jobs and firms are unable to find customers for what their plants can
produce.”

Following are the causes of stagflation:

Reduction in aggregate supply:

According to the modern economists one of the main factors causing stagflation in the
economy is the reduction in aggregate supply of goods.
It may be due to three sets of factors;
1. Resource Costs.
2. Reduction in labor supply.
3. Increase in taxes.
Remedies for stagflation:

1. The government should make every effort that minimum wages are not raised
during stagflation.
2. The increase in money wages should be linked with increase in productivity.
3. The personal and business taxes should be reduced to bring down the cost of
goods.
4. Transportation should be improved to provide facilities for searching out jobs in
production areas.
5. The government itself should take up development programs to create jobs in the
country.