INFLATION

Prepared By Click to edit Master subtitle style Mamoona Altaf

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Introduction Inflation can be defined as a continuous increase in the general price level of goods and services in the economy. Pure inflation means that prices of goods and inputs rise at the same time.
Inflation

rate = (CPI this year-CP previous year)/CPI previous year x100

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Cont

If price increase during the period of 2% to 3% (30 to 50) year this is called creeping inflation. If price increase during the time period of 10 year then this is called walking inflation. If price increase during the time period of 3 to 5 year , this is called running inflation. The most dangerous situation when prices increase in every year, every month or day by day , this is called hyper inflation.

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Topics of Discussion
DEMAND

PULL INFLATION COST - PUSH INFLATION

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DEMAND PULL INFLATION

Demand pull inflation occurs when aggregate demand exceeds the aggregate supply Demand pull inflation is commonly referred to too much money chasing too few goods and services Rise in aggregate demand which may to a rise in consumer demand or level of government expenditure or investment by firm or countrys exports .

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COSTPUSH INFLATION
Cost-push inflation refers to an increase in the general price level associated with an increase in the cost of production Inflation occurs due to the increase in the costs or supply prices of goods caused by increase in the cost of inputs e.g. increase in money prices of raw material.

Cost push inflation also occur when labour wages increase.

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Causes in the shift of AS

Wage-push

inflation = wage-push inflation occurs due to an increase in the wage level which will lead to an increase in the cost of production and the output price. Profit-push inflation = profit-push inflation occurs when certain producers or monopolists stock up on goods and create an artificial shortage. Import-push inflation = import-push inflation occurs when the prices of imported raw 5/13/12 materials or finished goods increase.

Negative aspects of inflation:

High or unpredictable inflation rates are regarded as harmful to an overall economy. people who have signedlabor contractshave seen a decrease in their real wage (the amount they can purchase). lenders will lose from arbitrary inflation interest rates will feel pressure to change Higher rates of inflation are disliked by business because it makes it more difficult to predict future costs. Therefore investment will be lower.

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Positive aspects of inflation:

People feel richer (money illusion) unexpected inflation benefits borrowers could be from extra growth in the economy or extra money which would lead to lowerunemployment rates if prices rise, then a currency devalues which would lead to growth in the export sector. The borrowers get benefit because real value of their loan repayments decrease at the same rate as inflation.

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How we can control inflation?

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: Monetary policy which is done by central bank.

Monetary Policy

It aims at reducing money supply in the market - Credit Control -Demonetization of Currency -Issue of New Currency

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Fiscal Policy:
Fiscal policy is done by government to control money supply.

Monetary policy alone is not sufficient to control inflation therefore it is supported by fiscal measures. It majorly pertains to taxation and interest policies. -Reduction in Unnecessary Expenditure -Increase in Taxes -Increase in Savings 5/13/12 -Surplus Budgets

Other Measures: Are those which aim at increasing aggregate supply addressing aggregate demand directly - Increase production - Rationale wage policy - Price control - Rationing

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From various monetary, fiscal and other measures it becomes clear that to control inflation government should adopt all measures simultaneously.

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