Macro Economics

M Ghani BBS(B&F)

Outlines

Inflation Types Causes Effects

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Inflation

Sustained upward trend in the general level of prices. A small rise in prices or a sudden rise in prices is not inflation.

Types

1. On the basis of causes.2. On the basis of speed.

1. On the basis of causes.

a) Currency inflation.b) Credit inflation.c) Deficit-induced inflation.d) Demand-pull inflation.e) Cost-push inflation.

a) Currency inflation.

Printing of cur rency notes.

b) Credit inflation.

Being profit-making institutions, commercial banks sanction more loans and advances to the public than what the economy needs.

c) Deficit-induced inflation.

Expenditure exceeds revenue.

d) Demand-pull inflation

An increase in aggregate demand over the available output leads to a rise in the price level.

e) Cost-push inflation.

Overall increase in the cost of production.

2. On the basis of speed.

a) Creeping.b) Walking Inflation.c) Running inflation.d) Hyperinflation.

a) Creeping.

If the speed of upward thrust in prices is slow but small then we have creeping inflation.

Annual price rise varies between 2 % and 3 %.

b) Walking Inflation.

If the rate of annual price increase lies between 3 % and 7%.

c) Running inflation

If the rate of annual price increase lies between 10 % and 20%.

c) Hyperinflation.

It is an extreme form of inflation when an economy gets shattered. "Inflation in the double or triple digit range of 20 %, 100 % or 200 %”.

Causes

1: Demand-Pull Inflation. Mon etarist’s argument: Spending of excess cash balances causes price level to rise. Price level will continue to rise until aggregate demand equals aggregate supply. Keynesians argument: Increase in aggregate demand i.e., in crease in (C + I + G + NX ) causes price level to rise.

Causes

2: Cost-Push Inflation. Raw materials. Increase in the price of petrol. Wage-push inflation or profit-push inflation. Fiscal policy changes.

Inefficiency, corruption, mismanagement of the economy may also be the other reasons. Thus, inflation is caused by the interplay of various factors. A particular factor cannot be held responsible for any inflationary price rise.

Effects

1. Effect on distribution of income and wealth:

People gain during inflation at the ex pense of others. Individuals gain more. some lose because prices rise more rapidly than their incomes.

Effects

2. Effect on economic growth:

An inflationary situation gives an incen tive to businessmen to raise prices of their prod ucts so as to earn higher volume of profit. Rising price and rising profit encourage firms to make larger investments. An increase in aggregate demand will increase both prices and output.

Source: http://www.economicsdiscussion.net/inflation/inflation-types-causes-and-effects-with-diagram/6401