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Understanding Inflation: Types and Effects

The document discusses various types of inflation including hyperinflation, stagflation, demand-pull inflation, and cost-push inflation. It also discusses measures that can be used to control inflation, such as monetary measures implemented by the Reserve Bank of India, fiscal measures like reducing import duties, and administrative measures like controlling black markets. Some consequences of inflation mentioned are a misallocation of resources, a shift to short-term capital use, changes in production patterns, potential recession if demand declines, and a reduction in purchasing power.

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Venkatesh Kannan
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51 views2 pages

Understanding Inflation: Types and Effects

The document discusses various types of inflation including hyperinflation, stagflation, demand-pull inflation, and cost-push inflation. It also discusses measures that can be used to control inflation, such as monetary measures implemented by the Reserve Bank of India, fiscal measures like reducing import duties, and administrative measures like controlling black markets. Some consequences of inflation mentioned are a misallocation of resources, a shift to short-term capital use, changes in production patterns, potential recession if demand declines, and a reduction in purchasing power.

Uploaded by

Venkatesh Kannan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

NFLATION

Inflation - It is a situation characterized by a gradual, sustained, unchecked rise in price level observed over a period of time which generates expectations of a further rise. - Hyper inflation is a situation in which there is a fast rise in general price level even to the extent that it may rise each day leading to short fall in value of money. People lose faith in domestic currency. Govt shifts to some hard currency as an alternate currency, also called galloping Inflation. - Stagflation is a situation in which inflation coexists with recession, unemployment and business permission. - Recession is a situation characterized by declining demand, declining investment and business permission. - Demand pull inflation refers to general rise in price level due to rise in demand of goods and services. This can be due to

Increase in wages and income. Increase in population FDI, FII, NRI investment, earnings of exporters Increase in black money. Increase in govt. expenditure. - Cost push Inflation refers to general rise in prices level when there is increase in overall cost of production, distribution etc. or a shortfall in supply of goods and services in general. This can be due to Infrastructural bottlenecks Rise in administered prices that are arbitrarily determined by government rather than market forces. Hoarding speculation and black marketing. Increase in international prices, which are beyond governments control. - Core Inflation/ Underlying inflation is inflation based on factors which are within preview of policy makers and excludes factors over which has not control. Control of Inflation:

- Monetary Measures: implies quantitative and qualitative credit control tools adopted by RBI to control inflation. eg CRR, Repo, Reverse Repo etc. - Fiscal Measures: Reduction in import duty. - Administrative Measures: Control of anti-black marketing and hoarding act. Essential services maintenance act 1955 Strengthening PDS. Consequences of Inflation - Production Pattern goes out of line with demand. Therefore there is mis allocation of resources. - Capital resources shift from long term to short term use. (High inflation benefits business and everybody wants to cash in now). - If inflation in non-essential goods then production shifts from essential to non-essential goods). - Inflation may lead to like in price of goods so much that demand of goods may decline. This leads to recession. - It reduces purchasing power of the people. While some people gain from inflation, fixed income earners lose from it, leading to inequality in society. - Inflation breeds corruption, black-marketing, speculation etc. - Because of in prices of inputs, exports become uncompetitive. Paint to Paint Inflation means inflation during a certain week ending last year as compared to corresponding week ending current year.

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