The rise in the general price levels of goods and services in an economy over a period of time.

Leads to devaluation of MONEY.

Measured in terms of Inflation Rate which is the percentage rate of change in price level over time, usually one year.

1. CREEPING INFLATION
2. WALKING INFLATION 3. RUNNING INFLATION 4. HYPER INFLATION

(0%-3%)
( 3% - 7%) (10% - 20 %) ( 20% and abv)

Govemment of a country prints money in excess, prices increase as there is too much money in circulation chasing too few goods. Increase in production and labour costs thereby increasing the price of the final product resulting in inflation. When countries borrow money they have to cope with the interest burden, resulting in inflation. High taxes on consumer products. When there is more demand for goods and services than what is produced. Non availability of a commodity leading to increase in prices.

When the balance between supply and demand goes out of control, consumers could change their buying habits forcing manufacturers to cut down production causing problems in the economy. Price increase can worsen poverty affecting low income household. Inflation creates economic uncertainty and reduces investment thereby slowing growth and finally reducing savings and thereby cutting consumption. The producers would not be able to control the cost of raw material and labor and hence the price of the final product. This could result in less profit or in some extreme case no profit, forcing them out of business.

Wage Inflation/ Demand Pull or Excess Demand inflation: Occurs when total demand for goods and services in an economy exceeds the supply of the same.
Cost-push Inflation: Occurs when there is increase in the cost of production of goods and services.

Pricing Power Inflation / administered price inflation: Occurs when the business houses and industries decide to increase the price of their respective goods and services to increase their profit margins.
Sectoral lnflation: Occurs when there is an increase in the price of the goods and services produced by a certain sector of industries. Eg. When the price of oil increases, the ticket fares would also go up.

Through sound MONETARY and FISCAL Policies.

The Monetary and Credit Policy is the policy statement, through which the Central Bank seeks to ensure price stability for the economy. The factors include - money supply, interest rates and the inflation. Besides, the Central Bank also announces norms for the banking and financial sector and the institutions which are governed by it.

During recession
consumers

stop spending as much as they used to business production declines, leading firms to lay off workers and stop investing in new capacity foreign appetite for the countrys exports may also fall. In short, there is a decline in overall, or aggregate, demand to which government can respond with a policy that leans against the direction in which the economy is headed. Monetary policy is often that countercyclical tool of choice.

Such a policy would lead to The desired expansion of output and employment It entails an increase in the money supply- thus results in an increase in prices. The economy gets closer to producing at full capacity, Increasing demand will put pressure on input costs, including wages. Increased income leads to consumption of more goods and services, further bidding up prices and wages and pushing generalized inflation upwardan outcome policymakers usually want to avoid.

Central bank changing the monetary policy. Change the size of money supply. Done through open market operations. Federal reserve system- buys/ borrows treasury bills -Commercial banks-central bank-cash in their accounts (Reserves that banks keep with it expands money supply). Fed- sells treasury securities banks- payment it receives Will reduce the money supply. Central banks focuses on interest rates rather than Specific amount of money.

Central banks- main focus- policy rate. It is the rate that one bank charges another to borrow funds When the central bank puts money into the system by buying or borrowing securities, colloquially called loosening policy, the rate declines. It usually rises when the central bank tightens by soaking up reserves.

Changing monetary policy has important effects on aggregate demand, and thus on both output and prices. If the central bank tightens, for example, borrowing costs rise, consumers are less likely to buy things they would normally finance such as houses or carsand businesses are less likely to invest in new equipment, software, or buildings. This reduced level of economic activity would be consistent with lower inflation because lower demand usually means lower prices.

A rise in interest rates also tends to reduce the net worth of businesses and individualsthe so-called balance sheet channelmaking it tougher for them to qualify for loans at any interest rate, thus reducing spending and price pressures. A rate hike also makes banks less profitable in general and thus less willing to lendthe bank lending channel.

High rates normally lead to an appreciation of the currency, as foreign investors seek higher returns and increase their demand for the currency.
Through the exchange rate channel, exports are reduced as they become more expensive, and imports rise as they become cheaper. In turn, gdp shrinks.

If policymakers hike interest rates and communicate that further hikes are coming, this may convince the public that policymakers are serious about keeping inflation under control. Long-term contracts will then build in more modest wage and price increases over time, which in turn will keep actual inflation low.

Purchase large quantities of financial instruments from the market.

Quantitative easing increases the size of the central banks balance sheet and injects new cash into the economy. Banks get additional reserves (the deposits they maintain at the central bank) and the money supply grows. Credit easing, may also expand the size of the central banks balance sheet. . For instance, the fed set up a special facility to buy commercial paper to ensure that businesses had continued access to working capital.

The central bank ensures the flow of finance to particular parts of the market.

It refers to the revenue and expenditure policy of the government which is generally used to cure recession and inflation and maintain economic stability in the country. During periods of recession there is not enough money circulating in the economy. During periods of inflation, there is too much. So the answer to these problems is to either put money in or take money out of the economy. At this point, economists begin to disagree over whom should do the putting in or taking out, and which means should be used to do so. Some favour fiscal policy while some favour monetary policy

1.REDUCTION OF GOVT. EXPENDITURE 2.INCREASE IN TAXATION 3. IMPOSITION OF NEW TAXES 4. WAGE CONTROL 5.RATIONING 6. PUBLIC DEBT 7. INCREASE IN SAVINGS

8. MAINTAINING SURPLUS BUDGET

Fiscal policy were introduced by British economist john maynard keynes during the great depression. Keynes argued, contrary to conventional thinking, that the market and the economy could not regulate itself. During periods of recession, consumers hold on to their money rather than spending it. Businesses were similarly afraid to expand operations and hire more workers. Therefore, the government needed to jump-start the economy by injecting some money into it by lowering tax rates and increasing government spending. By lowering taxes people had money to spend on buying cars and appliances which put people to work stimulating even more spending and job growth. By increasing government spending, the government put money directly into the economy. Building a dam, extending unemployment benefits, or hiring more teachers also put money into circulation.

Keynes argued that during periods of recession aggregate demand (AD)the total demand of consumers, businesses, and government at various price levels needed to be stimulated through government action. Through tax cuts and increased government spending, aggregate demand (AD1) would be increased (AD2).

The policymakers are in a debate that whose tax to be cut during the periods of recession Traditional Keynesian fiscal policy emphasizes putting money into the hands of middle and lower-class consumers, thereby stimulating the demand side of the economy. Others argue that more permanent growth is achieved by cutting business and corporate taxes, and by reducing capital gains taxes and personal income tax rates for wealthier taxpayers.

According to these supply-side theorists, the money saved through these sorts of tax cuts will be reinvested in new businesses and largescale expansion, thus generating more jobs.

But there is doubt that cutting of taxes may lead to government budget deficits--that is, government spending may exceed government income.

In response, some argue that short-term deficits are acceptable since once the economy starts to grow, tax revenues will increase. Others argue that deficits saddle future generations with debt and lead to high interest rates, crippling future growth.

The Monetary Policy regulates the supply of money and the cost and availability of credit in the economy. It deals with both the lending and borrowing rates of interest for commercial banks. The Monetary Policy aims to maintain price stability, full employment and economic growth.

The Monetary Policy is different from Fiscal Policy as the former brings about a change in the economy by changing money supply and interest rate, whereas fiscal policy is a broader tool with the government.
The Fiscal Policy can be used to overcome recession and control inflation. It may be defined as a deliberate change in government revenue and expenditure to influence the level of national output and prices.

1. BANK RATE OF INTEREST

2. CASH RESERVE RATIO

3. STATUTORY LIQUIDITY RATIO 4. OPEN MARKET OPERATIONS 5. MARGIN REQUIREMENTS 6. DEFICIT FINANCING 7. ISSUE OF NEW CURRENCY 8. CREDIT CONTROL

 CRR, or cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. During Inflation RBI increases the CRR due to which commercial banks have to keep a greater portion of their deposits with the RBI . This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation.

Banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements .
If SLR increases the lending capacity of commercial banks decreases thereby regulating the supply of money in the economy.

 It refers to the buying and selling of govt. Securities in the open market . during inflation RBI sells securities in the open market which leads to transfer of money to RBI. Thus money supply is controlled in the economy.

During Inflation RBI fixes a high rate of margin on the securities kept by the public for loans .
If the margin increases the commercial banks will give less amount of credit on the securities kept by the public thereby controlling inflation.

It means printing of new currency notes by Reserve Bank of India .If more new notes are printed it will increase the supply of money thereby increasing demand and prices. Thus during Inflation, RBI will stop printing new currency notes thereby controlling inflation.

During Inflation the RBI will issue new currency notes replacing many old notes. This will reduce the supply of money in the economy.

1. Increase in Imports of Raw materials 2. Decrease in Exports 3. Increase in Productivity 4. Provision of Subsidies 5. Use of Latest Technology 6. Rational Industrial Policy