Theory of Inflation

Theory of InflationIt is a paradox of sorts

MeaningPersistent and appreciable rise in pricesDiminishes the purchasing powerKeynes - expansion in the supply of money relative to the supply of things to purchaseToo much money chases too few goods

Economy and Inflation

Types of InflationPrices are determined by the intersection of demand and supply curvesPrice rises, when demand increases or supply decreasesTwo types of Inflation - Demand-Pull InflationCost-Push Inflation

Demand-Pull InflationExcess of demand for goods over their supplyAssumption - there is full employment in the economy, hence AS cannot increase muchAggregate Supply (AS) remains contact at the level of full employment

Demand-Pull Inflation

Causes

Cost-Push InflationRise in price is due to the rise in the cost of productionDemand stays unchanged, supply factor is critical.Has a domino effect, i.e., it ripples out to other industries (For example - Brent Oil)

Cost-Push Inflation

Causes

Causes of Inflation

Demand FactorsGrowth of populationRise in employment and incomeIncreasing pace of urbanization

Supply FactorsIrregular agricultural supplyHoarding of essential goodsRise in administered pricesInadequate growth of industrial productionAgricultural price policyRising prices of imports

Monetary and Fiscal FactorsRising levels of government expenditure - leads to increase in the money supplyDeficit FinancingQuantitative Easing (Add-on) used recently by the Fed in the US, in use by the Japan, was used in the form stimulas by the Union Government during the financial crisis.

Benefits of InflationRaises capital formationBeneficial for producers and tradersBusinessmen and rich classes are gainersDebtors are gainersFarmers are gainers

Dangers of InflationRise in inequalities of income and wealthDisrupts execution of projectsRise in black moneyLoss of tax revenueCreditors, wage salary, consumers and small investors face lossesHigh cost economy

Monetary Measures

Monetary MeasuresQualitative Instruments Raise Bank RateOpen Market OperationsVariable Reserve RatioRaise Cash Reserve RatioRaise Statutory Liquidity RatioQuantitative InstrumentRaise Marginal RequirementMoral Suasion

Fiscal MeasuresDetermined through the fiscal policy of the Government.Instruments - Revenue Policy - determining the taxation system.Expenditure Policy - maintaing the public expenditure system.

Other MeasuresControl of pricesWage freezeDividend freezePopulation control measuresIncrease in supply of goodsIncreased agricultural productionIncreased industrial consumer goods productionPublic Distribution of Essential GoodsIntegration of Prices and Income

Measuring Inflation

Measuring Inflation

Pop-up QuizWhat method is currently used to measure inflation in India?

Price Control

Thats it. Any questions?

Group MembersMohit Jindal 446Akansha Makkar 383Aniket Agrawal 27Khushboo Gupta - 392