Professional Documents
Culture Documents
Mohammad Salman
Ali Balister
Rajeev Vasudevan
Rakesh Aggarwal
Index
Introduction
Types of Inflation
Calculation
Causes
Effects of Inflation
Inflation and India (Impact on India)
Measures to Control Inflation
Inflation
Stagflation –
is used when there is stagnation as well as inflation.
The economic cycle and the MPC’s role
GDP
Time
Types of Inflation
Moderate Inflation
Running Inflation
Galloping Inflation
Hyper Inflation
1. Moderate Inflation
It occurs when prices are rising slowly & when
the rate of inflation is less than 10 per cent
annually or it is a single digit inflation rate
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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 after too few goods and
services
Rise in aggregate demand which may due to a
rise in consumer demand or level of government
expenditure or investment by firm or country’s
exports or a combination of the four
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General price level
AS
P2
P1
P0 AD2
Increase in AD
An increase in above full
AD0 towards Yf
employment
(AD1 to AD2) (AD1
showto increase
AD2) increase
in AD1
price to P2level (P0 to P1)
the price
AD0
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COST–PUSH INFLATION
Cost-push inflation refers to an increase in the
general price level associated with an
increase in the cost of production
Cost-push inflation basically means that
prices have been “pushed up” by increases in
costs of some of the factors of production
such as labor, capital etc.
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Effects of Inflation
Inflation can have negative and positive
effects on an economy.
Negative Effects:
Negative effects of inflation include: loss in
stability in the real value of money and other
monetary items over time; uncertainty about
future inflation may discourage investment and
saving, and high inflation may lead to shortages
of goods if consumers begin hoarding out of
concern that prices will increase in the future.
Positive Effects:
Positive effects include a mitigation of economic
recessions, and debt relief by reducing the real
level of debt.
NEGATIVE EFFECTS
1. Purchasing power
Inversely related to price
–price, dollar buys less
–(deflation, dollar buys more)
An increase in the general level of prices implies a
decrease in the purchasing power of the currency.
That is, when the general level of prices rises,
each monetary unit buys fewer goods and
services
2. Cost-push inflation
Rising inflation can prompt employees to demand
higher wages, to keep up with consumer prices.
Rising wages in turn can help fuel inflation. In the
case of collective bargaining, wages will be set as
a factor of price expectations, which will be higher
when inflation has an upward trend. This can
3. Interest rates rise in response to
inflation
Discourages some borrowing and spending
High inflation rates devalue savings
Savings lose value if interest rate is less than
the inflation rate
4. Market Inefficiency
High or unpredictable inflation rates they add
inefficiencies in the market, and make it difficult
for companies to budget or plan long-term.
Inflation can act as a drag on productivity as
companies are forced to shift resources away
from products and services in order to focus on
profit and losses from currency inflation
A change in the supply or demand for a good
will normally cause its price to change,
signaling to buyers and sellers that they should
re-allocate resources in response to the new
market conditions.
Investors are scared to invest for long-term
purposes hence the short-term investments
increase.
Positive Effects
1. Labor-market adjustments
This can lead to prolonged disequilibrium and
high unemployment in the labor market.
Inflation would lower the real wage if nominal
wages are kept constant.
As it would allow labor markets to reach
equilibrium faster.
2. Debt Relief
Debtors who have debts with a fixed nominal
rate of interest will see a reduction in the "real"
interest rate as the inflation rate rises.
• Banks and other lenders adjust for this inflation risk either
by including an inflation premium in the costs of lending
the money by creating a higher initial stated interest rate
or by setting the interest at a variable rate.
3. Room to maneuver
The primary tools for controlling the money
supply are the ability to set the discount rate, the
rate at which banks can borrow from the central
bank.
open market operations which are the central
bank's interventions into the bonds market with
the aim of affecting the nominal interest rate.
Inflation & India
Impact of Inflation in India
10%
12%
0%
2%
4%
6%
8%
Mar-95
Jun-95
Sep-95
Dec-95
Mar-96
Jun-96
Sep-96
Dec-96
Mar-97
Jun-97
Sep-97
Dec-97
Mar-98
Jun-98
Sep-98
Dec-98
Mar-99
Jun-99
Sep-99
Dec-99
Mar-00
Jun-00
Sep-00
Dec-00
Mar-01
Wholesale Price Inflation
Jun-01
Sep-01
Dec-01
Mar-02
Jun-02
Sep-02
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Inflation & India
Indian inflation is measured by Wholesale
Price Index (WPI) is released every week. Past
One month this number came out negative for
the first time in 32 years.
Although WPI is indicating deflation, no one in
India is concerned about it and this negative
number is attributed to high base index.
The Economic Effects of Inflation
government.
As prices are higher at time of inflation the revenue
generated is high.
So, we can make out that government is net
INFLATION
EMPLOYMENT
ECONOMIC GROWTH
Effects of Inflation on Employment
Inflation when not allowed to grow
INFLATION
EMPLOYMENT
ECONOMIC GROWTH
Effects of Inflation on Common
People
Goods Once Essential, now luxurious
1. Bank rate :
In case of inflation, the bank rate is increased; the supply of money is
controlled.
4. Credit Rationing:
When there is inflationary pressure, the State bank adopts the policy of credit
rationing.
5. CRR (Cash Reserve Ratio):
Cash Reserve ratio is amount of cash that a Bank has to kept with RBI.
3. Price control policy: The govt. should adopt strict price control policy
against the profiteers and hoarders.
Reducing the central bank interest rates and increasing bank interest rates.
the budgetary deficit should be kept low level. The deficit should be met by disciplined
policy of demand management. Emphasis on commodity producing sectors:The
government should give special attention to the production of cottons, wheat, vegetable ,
edible oil etc. it will have soothing effects on inflating.
Commodity balance: