BANKING

Q. #: What is Commercial Bank? Also mention its relative functions?

1. COMMERCIAL BANK:

A bank is a financial institute which gives money and credit. It accepts deposits from individuals, firms and companies at a lower rate of interest and gives at higher rate of interest to those who need them. A bank thus is a profit earning institute.According to Crowther, “A bank is a firm which collects money from those who have it spare. It lends money to those who require it.” In the word of Mr. Parking, “A bank is a firm that takes deposits from households and firms and makes loans to other households and firms.”

FUNCTIONS OF COMMERCIAL BANK:

A commercial bank performs a variety of functions. These functions are classified under two main heads, (1) Primary functions (2) Secondary functions

1) Primary Functions: The primary functions of commercial bank are as under:(a) Accepting of deposits (b) Advancing of money/Making loans.

(a) Accepting of deposits:The first important function of commercial bank is to

accept deposits from those who can save but can’t make profitable use of their saving themselves. In order to attract the saving from different persons and institutions, the bank maintaining the three types of accounts.

(i) Current Account: A current account is one which can be operated continuously without any restrictions. The customer can draw cheques against the account. Therefore the bank usually doesn’t pay the interest on the current account deposits. The current account holder receive cheque book and regular statement containing details of money paid in and paid out.(ii) Saving Account: The aim of this account is to encourage and mobilize savings of the people. Saving account is generally opened by persons of small income. The banks pay interest on this type of deposits. However, the banks normally place restrictions on their frequent withdrawal.

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(iii) Fixed Deposit Account: Fixed deposits are kept with the banks for a specified period of time. The rate of interest on fixed also called “term deposit” are fairly high. The longer period of deposit, the high is the rate of interest.

(b) Advancing of money/Making loans:The second major function of commercial bank is to make

loan to businessman, traders, exporters, householders etc. These loans are made against documents of title of goods, marketable securities and personal securities of the borrowers etc. The loaning of money may be in any of the following forms.

(i) Cash Credit: It is very common form of borrowing by business concerns. The bank advances loan to the commercial and industrial units against the security of goods. The borrower if permitted to draw within the cash credit limit sanctioned by the bank. The interest is charged only on the amount of money withdrawn by the borrower.(ii) Loans: The commercial bank grant short and long term loan to individual, firms, and companies mostly against securities. The amount of loan is credited to the borrowers’ account who withdraws it as per his requirement.

2) Secondary Functions: Secondary functions of commercial bank are classified as under: (a) Agency Functions (b) Utility Functions

(a) Agency Functions: The agency function bank act as agent of there customer

in various ways as:

(i) Collection of Cheques: It acts as agents to its customers in the collection and payment of cheques and bills.(ii) Collection of dividends: The bank provides a very useful service in the collection of dividends or interest earned on shares held by its customers.(iii) Purchase or Sale of securities: The bank, if authorized by customers, purchases or sells securities on his behalf and adds another benefit to its portfolio.

(b) Utility Functions: A bank performs a number of other general utility services to its clients which are given below:

(i) Issue of Traveler’s Cheque: The bank also issues traveler’s cheques for the convenience of the travelers and charges a nominal commission.(ii) Export Promotion Cell: In order to boost (push) the exports of the country, the banks have established export promotion cells. These cells provide information and guidance to the exporters at no extra cost.

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(iii) Advice on Financial Matters: Sometimes the banks give valuable advices on various financial matters to their customers.(iv) Safe Custody of Valuable: The banks keep valuable ornaments, documents etc, for safe custody.

Q. #: What are the different types of Commercial Bank?

2. KINDS OF COMMERCIAL BANK:

Following are the main kinds of commercial bank, which are given below.(i) State Bank: Every civilized country now has its own central bank or state bank. The primary functions of state bank are to arrange the flow of money and credit in order to promote efficiency and stability in the country. In Pakistan State Bank of Pakistan is the country’s central bank.

(ii) Commercial Bank: Commercial Banks are those banks which are engaged in performing the routing duties of banking business. They collect surplus money from the people. They make loans and advances in the form of O/D (overdraft) cash credit. Commercial Banks are also providing agency service and utility services. The banks in short are considered the life blood of economic society. In Pakistan, the NBP, UBL, HBL, MCB, etc. are performing the functions of commercial banks.

(iii) Foreign Exchange Bank: The Foreign Exchange Bank mainly deals with international trade. These banks take the responsibility of settlement of foreign exchange and arrange the foreign business in Pakistan. All the nationalized commercial banks have been allowed to do the business of exchange banks.

(iv) Saving Center Bank: Saving Banks are those banks which collect and keep small saving of people. The saving banks invest the funds in the safe way government security. Post offices and saving centers perform the business of saving banks of Pakistan.(v) Agriculture Development Bank: Agriculture Banks are setup to provide the financial assistance to the agriculture. The agriculture banks provide short term credit to the farmers for the purchasing of seeds. They also make medium term advances for buying Tracters and modern technology. ADBP (Agriculture Development Bank of Pakistan) was setup in 1981, to meet financial requirement of agriculture.

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(vi) Industrial Development Bank: These banks mainly provide medium and long term credit to the industries. Since the industrial bank have long-term deposit. They are in a position to permit long term investment in industries. In Pakistan Industrial Bank was setup in 1961, other institutions engaged in providing financial assistance to industries are PICIC commercial bank, NDFC bank etc…

Q. #: What are the different type of customer of Commercial Bank?

3. TYPES OF CUSTOMERS:

Every commercial bank is anxious to increase its customers. However, every one can’t be accepted as its customer. Only those persons who are competent in law to enter into a contract can be considered as customers. The customers of a bank can mainly divide into two categories (1) Ordinary Customers and (2) Special Customers. Ordinary Customers are those who are competent to inter into contract under the laws of land. And individual, a body corporate, a firm can open an account with the bank. The bank before accepting one as a customer weighs the customer’s financial position, his character, honesty, social standing and good will in the society. The special customers are those who are dealt with as special ones legally. The relationship between bank and special type of individual customers are governed by the legal rules enforced in the country.

The special types of individual customers of the commercial banks are (i) Minor (ii) Lunatic (iii) Drunkard (iv) Married Women (v) Purdah Observing Women and (vi) Illiterate persons.

(i) Minor Customer: A person who has not attained the age of 18 years is a minor. A minor cannot enter into a contract. Therefore, any contract with minor is void.

However, a bank can accept & open a minor’s account if it is directed by the Guardian Court. The Court appoints a guardian of a minor who obtains and signs the prescribed opening form of the account himself. He gives his won specimen signatures for the operating of the account. On attaining the age of majority which is 21 years, the minor is allowed to open and operate the account himself.

(ii) Lunatic Customer: A person who is incapable of understanding, is of unsound mind, cannot enter into contract

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with the banker as customer. If an account is already existence of a same person but his mental status is disturbed, the bank on knowing the customer going insane will immediately stop payment from his account and suspend all transactions till he receives either satisfactory evidence of his recovery or an order is received from the court.

(iii) The Drunkard Customer: If a person is in state of intoxication & is not in senses, he cannot open an account with a bank. The main condition of valid contract with a bank is between persons who are of sound mind. However, if a person is drunk, is of sound mind, he may open & operate an account with a bank.

(iv) The Married Women Customer: Man & Woman are equal in the eyes of law for the purpose of making a contract. A married woman has every right to enter into contract with a bank and open an account. A married woman is as good as a male member of the society so far as law is concerned. She can open any type of account including Foreign Currency Account in her name. If may here be noted that a married woman cannot make her husband responsible for the debt incurred by her. It is a sole responsibility of the married woman to repay the loans and advances made in her name by bank.

(v) The Purdah Observing Woman Customer: The bank has to be very cautions in opening an account of Purdah observing lady. She cannot be treated at par as with other women. Before accepting a Purdah observing woman as customer, the banker must carry out a thorough scrutiny (inspection) about the identity of woman. A very close referee of introducer, from the point of view of the parties, the customer and banker should confirm the identity of the Purdah observing lady.

(vi) The Illiterate Person Customer: An illiterate person from the banker’s point of view is the person who cannot put his signatures. He uses his thumb impressions in place of signatures for identification. The banker has, therefore, to be very cautions in honoring the cheques of illiterate person. The banker usually takes the following precautions in this regard.

A Certified photograph of an illiterate person is pasted on the signature card for identification.

At least two left hand thumb impressions are placed in place of specimen signatures for identification.

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Q. #: What precautions are usually undertaken by bank, before cash advances?

4.PRECAUTIONS OF CASH ADVANCES:

The following are the precautions are usually undertaken by bank, these are given below.(i) The customer to be Honest, Responsible and Trustworthy: Before advancing loans against goods or documents of title of goods, the banker must be thoroughly satisfy himself about the honesty, trustworthy and experience of the borrower in the trade or business.

(ii) Familiarity with different markets: The banker must be familiar with the up & down of the price in the commodities, against which he gives to advance loan earlier. The up-to-date knowledge of the different market enables the banker to regulate the margin for loans against produce goods.

(iii) Readily saleable commodities: The banker should advance loan against those commodities which are of seasonal nature & are readily saleable in the market.

(iv) Possession of Goods: In order to secure the loan the banker should take passions actual or constructive of the goods. He should also have a direct contract with the owner or the agent who is in possession of commodities.

(v) Storing of goods in the bank’s Godown: The banker should not allow the goods to remain in the godown of the customer unless the key of the godown and the services of the watchman transferred to the bank.

(vi) Commodities having Stable Market: The banker should prefer to advance loans against those commodities whose demand is less inelastic. The goods with stable markets are less liable to market fluctuations.

(vii) Proper Evaluation: The banker should accurately ascertain the prices of commodities pledge for loan. He can get information about the prices from commodities broker, journals and daily news papers.

(viii) Insurance of Goods Pledged: The banker must also insure the goods of the customer pledged with the bank against loss of fire, theft, etc. up to their full value.

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Q. #: What is State Bank of Pakistan? Also mention its relative functions.

5. STATE BANK OF PAKISTAN:

The State Bank of Pakistan was established on 1st July 1948, it is the central bank of Pakistan. The head office of SBP is at Karachi & branches are at Lahore, Peshawar, Quetta, Faisalabad, Rawalpindi, Islamabad, Multan, Sialkoat, Sukkur, and Hyderabad. The state bank is the leader of all the other banks. It doesn’t compete for profit. It has right t issue notes (currency). It is bank of Govt. and commercial bank. It controls the operation of other banks for monetary and economic stability in the country.

The state bank is managed by a central board of directors. It includes one Governor, one more deputy Governor, and nine directors nominated by the Federal Government. There is also an executive committee which is empowered to transit business on behalf of the central board of directors. The Chief Executive of the bank is the governor, who controls and directs the affairs of the bank on behalf of the central board. The central directorate of SBP has the department over 5,000 employees the departments are:(i) Administrative Department (ii) Accounts Department (iii) Agriculture Credit Department (iv) Audit Department (v) Banking Control Department (vi) Banking Inspection Department (vii) Engineering Department (viii) Exchange Department (ix) Legal Division Department (x) Public Relation Department (xi) Research Department (xii) Statistical Department(xii) Security Department (xiv) Training Department.

FUNCTIONS OF STATE BANK OF PAKISTAN:

(a) The Bank of note issue: The State Bank has the soul right for the issuance of notes. The bank has issued currency notes of rupees 10,20,50,100,500,1000,5000, the notes are issued under fixed minimum reserve system. The bank keeps 30% in goals or foreign exchange, & 70% in form of securities; therefore notes issued by the bank are fully convertible.(b) Banker to Government: The State Bank deal as a bank to the central and provincial government. It accepts deposits of the government. It pays cheques on behalf of the government. It pays cash for payment of salaries & wages. It provides loan to

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the Govt. for ninety days. It transfers fund from one account to another account & from one place to another place. The bank pays no interest on govt. accounts.(c) Agent to the Government: The State Bank of Pakistan as an agent receives loan for government payments, interest on debts and discount on treasury bills as control the foreign exchange.(d) Advisor to Government: The State Bank also acts as advisor to the govt. in all financial matters. Since the State Bank is directly involve in the money and foreign exchange markets. It also provides advice to commercial bank & other financial institution & to commerce & industries in general.(e) Exchange Control: The State Bank is authorized to control foreign exchange. It has control over the foreign receipts and payments. The bank has exchange control department for control on the foreign exchange operations.(f) Controller of Credit: The bank controls the volume of credit it is necessary for the economic development of the country. The credit is controlled by the bank rate, policy open market operation. It is the most important function of the bank. (g) Custodian of Foreign Exchange: The State Bank of Pakistan acts as a custodian of forex. It gives gold, silver, foreign currency, foreign bills at other securities. Such reserves are necessary for making payments to the other countries. The bank controls the movement of capital.(h) Remittance Facilities: The State Bank of Pakistan provides facilities for transfer of money from one to another place to the members’ bank. The bank doesn’t receive any commission for it.

Q. #: What is World Bank? Also discuss its relative functions and criticism.

6. WORLD BANK:

The name World Bank has too different financial real existence. It’s also called International Bank for Reconstruction & Development (IBRD) & International Development Association (IDA). The World Bank is international bank for reconstruction and development was established in 27th

December 1945. The bank started operation on 25th June 1946. The IBRD has it is head office at Washington DC, USA.

The management is vested with the board of governors, consist one governor from each member country and 22 full time executive directors. The board normally meets ones a year. The

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governor of the bank have delegated their many powers to a board of Executive Directors, 5 directors appointed by five members like, USA, Japan, Germany, France, UK, being a largest stock holders and 17 are elected by the governor representing the other member countries. The Board of Directors performs its duties on a full time basis. The president of the bank is the Chairman of the Board.

The world bank provide assistance for many projects like, electricity power, transport, agriculture, rural and urban developments, water and sewerage development, population, health, education, housing development, about 75% of the landing is for roads plans, power station, agriculture and industries. The IRBD loans are for 20 years or less with a gress period of 5 years. The loans are made to government or entities which can sure government guaranties of repayment. The World Bank on the whole has help increasing the pare of economic development of different countries of the world.

FUNCTION OF WORLD BANK:

Principal functions of World Bank are as under:

i) To assist in the reconstruction and development of member countries by facilitating the investment of capital for productive purpose.ii) To promote and supplement private foreign investment.iii) To give performance more useful and urgent projects.iv) To assist in bringing about a smooth transaction for war time to peace time economy. v) To ensuring that it is loan help in the raising the standard of living of the people in the borrowing member countries.vi) World Bank helps now the poorer countries of the world it provides recovery of advice & information besides the making loans.

CRITICISM ON WORLD BANK:

The working of World Bank is criticized on the following grounds.

i) The World Bank charges a very high rate of interest on its loan.ii) There is discrimination in advancing loan to member Europe & Western countries of smaller both in area and population, they have received large amount of loans where Asia and Africa both is rich in natural resources are being given up stamp motherly treatment.iii) The loan given by World Bank to the developing countries is too small to play an effective role in developing their economy.

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Q. #: What is money? Also define its functions.

7. MONEY:

Money is difficult concept to define. The term money means purchasing power, something which buys things. In other words money is purchasing power that can exercise and immediate demand on goods and services. Obviously such purchasing power must be generally accept as means of payments, medium of exchange, historically in remember able things have served, as money in the modern world. However, in the most countries money the supply of consists of (i) Currency Money (ii) Deposit Money.(i) Currency Money: It is in the form of coins & paper notes. It is legal tender money. It is the money which must by law is accepted in payments of money obligation. In very backward countries currency money is the main item of money.(ii) Deposit Money: Demand Deposit or accounts in the bank fulfill charging all the conditions necessary to be designated as money, cheques which present demand deposit inspite are purchasing power they buy goods & services.

FUNCTIONS OF MONEY:

1) Money as a medium of exchange:In all market transactions, money is used to pay for

goods and services. The sale or purchase of goods is done through money. Money, in other words, acts as a medium of exchange and helps in overcoming the difficulty of double coincidence of wants of the barter economy.

The use of money as a medium of exchange has helped in promoting efficiency in the economy. It has reduced much of the time spent in exchanging goods and services. It has also promoted efficiency by allowing people to specialize in any area in which they have comparative advantage and receive money payments for labour. The use of money as medium of exchange has permitted more specialization by lowering transaction cost and encouraging division labour.

2) Money as standard of deferred payments:Another function of money is that it is used as a mean of

settling debts maturing in the future. In modern economy, most of the business is done on credit. Goods are brought and sold on the promise to pay money on a certain date in future. Debts are stated and paid terms of units of account.3) Influence on income and consumption:

The use of money has a direct bearing on the levels of income and consumption n the country. All production takes

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place for the market and the factor payments (rent, wages, interest and profit) are made in money. The higher the production, the higher are the remuneration to the factors and vice versa.4) Money is an instrument of making loans:

People save money and deposit it in banks. The banks advance these savings to businessmen and industrialists. Money is thus the instrument by which saving are transferred into saving.5) Money is a tool of monetary management:

Money is important tool of monetary management. If the money is effectively used, it helps in increasing output and employment. Money is also an important factor in determining the distribution of income and wealth among the members of the society.6) Instrument of economic policy:

Money is an important instrument of economic policy of the government. In order to achieve growth, reduce unemployment and maintain regular expansion of economic activity; money is the most powerful factor.

Q. #: What is inflation? Also mention its relative causes, remedies and kinds.

INFLATION:

Inflation is a process in which the price is rising at a rapid rate and the money is losing its value. In the words of Gardner Ackley, “Inflation may be defined as a persistent and appreciable rise in general level of average of prices.” It may here denote that rising general level of price doesn’t mean that all prices are necessarily rising. Even during inflation, the prices of some goods may remain relatively constant and a few others actually falling. Inflation also does not mean that prices of goods rise evenly or proportionately. Inflation is an upward movement in the general (average) level of prices. In Pakistan, the general price level is persistently rising since Partition of the Subcontinent. Prices remained volatile during the decade of 1990’s ranging form 5.7% to 13% mainly because of declining economic growth, expansionary policies, output set backs, higher taxes and a depreciation of Pakistani rupee. The inflation rate started declining form 1998 on ward due to improved supply position of goods, strict budgetary measures. The inflation rate was 5.7% in 1998-99. It was brought down to 3.6% in 1992-2000 and further to 3.1% in 2002-03. The inflation rate based on the CPI (Consumer Price Index) has averaged 4.6% during 2003-04. The slight rise in prices was

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the year 2004-05 mainly due to rise in the price of wheat and an increase in the international oil price.

CAUSES OF INFLATION:

The causes of inflation are generally grouped under two main heads (a) Demand Pull Inflation (b) Cost Push Inflation.

A. Demand Pull Inflation:

Demand pull inflation occurs when aggregate demand for goods exceeds aggregate supply of goods at current prices, thus leading to an increase in the price level. The factors of which bring about increase in aggregate demand for goods or rise in the general level of prices are grouped under two separate heads; (i) Factors operating on demand side (ii) Factors operating on the supply side.

(a) Factors operating on the demand side: These are the factors which bring continuous rise in the general price level.

(1) Increase in money supply: An increase in money supply leads to an increase in money income. The increase in money income raises the aggregate demand for goods and services in the country. The supply of money increases when the govt. resorts to deficit financing or the commercial banks expand credit. When too much money chases too few goods, the result is an increase in general price level.

(2) Increase in Government expenditure: If there is increase in govt. expenditure due to adoption of development and welfare activities of the country has to flight a war, it causes as increase in govt. expenditure which leads to increase in aggregate demand for goods and services and hence the price level goes up.

(3) Increase in private expenditure: A continuous increase in consumption and investment expenditure in the private sector raises the demand for goods and services and leads to inflationary rise in prices.

(4) Increase in population: The rapid rising population exerts pressure on the demand for goods and services. If the supply of goods and services fail to match with the demand, the general price level moves upward.

(5) Black money: The money generated through smuggling, tax evasion etc. raises the demand for luxury and other goods. Hence black money is also one of the causes in raising the aggregate demand for goods and a rise in general price level.

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(b) Factors causing decrease in supply of goods: If the increase in aggregate demand for goods and services is matched by an increase in the supply of goods, it will not cause inflationary situation. When the aggregate supply of goods is at a slower pace than the growth in aggregate demand, it then causes inflationary rise in prices. The following factors are identified for relatively slower growth in the supply of goods.

(i) Lagging agricultural & industrial production: The increase in population, incomes, employment and urbanization exert pressure on the demand for goods and services. However, the agricultural and industrial production grows at a slower pace, due to shortage of essential inputs like fertilizers, water, cement, iron etc. When aggregate demand for goods and services exceeds the aggregate supply of it, it causes a rise in the prices of agricultural and industrial goods.

(ii) Inadequate infrastructure facilities: If, in a country there is shortage of power, transport and communication facilities are slow and inefficient, it results in the slowing down of overall production of goods. When the supply of goods falls short of demand, the prices go up in the country.

(iii) Long gestation period: If the time lag between investment and the production of goods is long, the shortage of goods will arise. This will also contribute to inflationary pressure in the economy.

B. Cost Push Inflation:

Cost push inflation occurs when there is an increase in the cost of production of goods and is not associated with excess demand. The main causes of cost push inflation are:

(1) Increase in money wage rate: The wage push inflation occurs when strong labour unions manage to press for wage increases in excess of labour productivity. Unit cost of production is thereby raised. The rise in cost of production exerts pressure on sellers to increase prices of goods so as to get profit margin.

(2) Profit push inflation: If the producers of certain commodities have monopoly or near monopoly power in the market, they fix up higher profit margins arbitrarily without any increase in other elements of cost. When a few powerful firms increase the profit margins, the smaller firms also tend to mark up their profit margins. The higher profit margins, thus, inflate the price level.

(3) Material push inflation: If there is increase in the prices of some basic materials such as gas, steel, chemicals,

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oil etc which are used directly or indirectly in almost all industries, it causes an increase in the cost of production and hence in the general price level.

(4) Higher taxes: If the government levies new taxes and raises the rates of old taxes the producers generally shift the burden of taxes on to the consumers. The increases in the selling prices of the commodities push up the inflationary trend in the economy.

(5) Import prices: If prices of imported goods increase, it also results in the contribution of inflation.

KINDS OF INFLLATION:

Inflation is of different types. It is generally classified on the following basis.

On the Basis of Rate of Inflation:

(i) Creeping Inflation: It is a situation in which the rise in general price level is at a very slow rate over a period of time. Under creeping inflation, the price level raises upto a rate of 2% per annum. A mild inflation is generally considered a necessary condition of economic growth.

(ii) Walking Inflation: Walking inflation is a marked increase in the rate of inflation as compared to creeping inflation. The price rise is around 5% annually.

(iii) Running Inflation: Under running inflation, the price increases is about 8% to 10% per annum.

(iv) Galloping or Hyper Inflation: Galloping inflation is a full inflation. Keynes calls it as the final stage of inflation. It is a stage of inflation which starts after the level of full employment is reached. Here price level rises very rapidly within a short period.

On the Basis of Degree of Control:

(i) Open Inflation: It is a stage when the rise in price level gets out of control. Milton Friedman describes it as “inflationary process in which prices are permitted to rise without being suppressed by government price control or similar measures.

(ii) Suppressed Inflation: Under this type of inflation, the government makes efforts to check and control the rise in price level through price and rationing. When price level is suppressed by the above short term measures, it results in

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many evils such black marketing, hoarding, corruption & profiteering.

Inflation on the Basis of Causes:

(i) Demand Pull Inflation: Inflation caused by increase in aggregate demand, not matched by aggregate supply of goods, resulting in rise of general price level is called demand pull inflation. Demand pull inflation to be simpler, occurs when the demand for goods and services in the country is more than their supply. The effective demand for goods increases due to many factors such as increase in money supply, increase in the demand for goods by the government, increase in the income of various factors of production etc. In short, the excessive increase in the money supply causes inflationary conditions. Demand pull inflation is generally characterized by shortage of goods and shortage of workers.

(ii) Cost Push Inflation: Cost push inflation occurs when the increasing cost of production pushes up the general price level. Cost pull inflation occurs when the economy is below full employment with prices rising even though there is no shortage of goods. Cost push inflation is the result of increase in wage costs unaccompanied by corresponding increase in productivity, rise in import prices of goods, depreciation in the external value of the currency, higher mark up etc, etc.

(iii) Profit Induced Inflation: Profit inflation is in fact categorized under cost push inflation. When entrepreneur, due to their monopoly position raise the profit margin on goods. It may cause profit push inflation.

(iv) Budgetary Inflation: When the government of a country occurs the deficits in the budgets through bank borrowing and creating new money (Deficit Financing), the purchasing power of commodity increases without a simultaneous increase in the production of goods. This leads to rise in the general price level.

(v) Monetary Inflation: Milton Friedman is of the firm view that inflation is always and anywhere a monetary phenomenon. According to him, inflation is caused by a too rapid increase in the money supply and by nothing else.

(vi) Multi Casual Inflation: Inflation has a number of causes. It may be caused by increase in money supply, excessive wage demands, excess aggregate demand for goods, shortage of goods etc. The chief cause of inflation in one year may not be in the next year. Since inflation is multi causal, therefore a variety of policy measures are needed to deal with it.

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On the Basis of Employment:

(i) Partial Inflation: According to J.M. Keynes, takes place when the general price level rises partly due to an increase in the cost of production of goods and partly due to rise in supply of money before the full employment stage is reached.

(ii) Full Inflation: Full inflation prevails when the economy has reached the level of full employment. Any increase in money supply beyond full employment. It is also called as real inflation.

Anticipated versus Unanticipated Inflation:

(i) Anticipated inflation is the rate of inflation which majority of the individual believes will occur. When the rate of inflation (say 6%) turns out to be same (6%) we are then in a situation of fully anticipated inflation.

(ii) Unanticipated inflation is that which comes as a surprise to majority of individuals. It can be higher or lower than the rate of anticipated inflation.

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