m In economics, inflation is a rise in the general level of

price of goods and services in an economy over a period of

time. When the general price level rises, each unit of
currency buys fewer unit fewer unit of goods and services.

mInflation also reflects an erosion in the purchasing power

of money ± a loss of real value in the internal medium of
exchange and unit of account in the economy.

mA chief measure of price inflation is the inflation rate, the

annualized percentage change in a general price index
(normally the consumer Price Index over time.)
R
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 inflation mitigates the severity of
economic recession.
j
 
 xecrease in the real value of money and other monetary
items.

 xiscourage investments and savings.

It may lead to shortage of goods if consumer begins

hoarding out of concern.
îoney Lending Rate
îEconomic Growth (GxP)

îoney Supply

he gross domestic product á
 or gross
domestic income (
) is the amount of goods and
services produced in a year, in a country.
 It is the market value of all final goods and services
made within the borders of a country in a year.
 It is often positively correlated with the standard of
living alternative measures to GxP for that purpose.

he relationship between inflation and economic output
(GxP) is a very delicate one.
 For stock market investors, annual growth in the GxP
is vital.
 If overall economic output is declining or merely
holding steady, most companies will not be able to
increase their profits, which is the primary driver of
stock performance.
 However, too much GxP growth is also dangerous, as
it will most likely come with an increase in inflation,
which erodes stock market gains by making our money
(and future corporate profits) less valuable.
î ost economists today agree that 2.5-3.5% GxP growth
per year is the most that our economy can safely maintain
without causing negative side effects.

îOver time, the growth in GxP causes inflation, and

inflation begets hyperinflation. Once this process is in
place, it can quickly become a self-reinforcing feedback
loop.
his is because in a world where inflation is
increasing, people will spend more money because they
know that it will be less valuable in the future.
his causes
further increases in GxP in the short term, bringing about
further price increases.
 oney supply or money stock, is the total amount
of money available in an economy at a particular
point in time.

here are several ways to define "money," but
standard measures usually include currency in
circulation and demand deposits (depositors' easily-
accessed assets on the books of financial
institutions).
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In mathematical terms, this equation is really an identity which is true
by definition rather than describing economic behaviour.

hat is, each term is defined by the values of the other three. Unlike
the other terms, the velocity of money has no independent measure
and can only be estimated by dividing PQ by .

Adherents of the quantity theory of money assume that the velocity of

money is stable and predictable, being determined mostly by financial
institutions.

If that assumption is valid, then changes in  can be used to predict

changes in PQ. If not, then the equation of exchange is useless to
macroeconomics.
In terms of percentage changes (to a close approximation
under small growth rates, the percentage change in a product,
say XY, is equal to the sum of the percentage changes %ǻX
+ %ǻY).
So: Œ  Œ
 Π Π

hat equation rearranged gives the "basic inflation identity":

Π Π Π
Œ

Inflation (%ǻP) is equal to the rate of money growth (%ǻ),
plus the change in velocity (%ǻV), minus the rate of output
growth (%ǻQ). As before, this equation is only useful if %ǻV
follows regular behaviour. It also loses usefulness if the
central bank lacks control over %ǻ.
m PLR is the rate of interest based on which the banks
lend money to their credit-worthy customers.
his rate is
considered as the standard rate for most of the loans.

m
he PLR is influenced by RBI¶s policy rates ² the repo
rate and cash reserve ratio ² apart from the bank¶s
policy. In simple words, availability of funds in the
banking system and demand for credit by consumers
(both retail and industrial) determine what the PLR
should be.