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Unit IV
Session 35
Meaning and Definition
Inflation means generally a considerable and persistent rise in the
general price level.
According to Pigou, “Inflation exists when money income is
expanding more than in proportion to increase in earning
activity”.
According to Coulborn, Inflation is a situation of “too much
money chasing too few goods”.
According to Ackley, “Inflation is a persistent and appreciable rise
in the general level or average of prices”.
Types of Inflation
Moderate Inflation: A single digit rate of annual inflation is
called moderate inflation or creeping inflation. Here prices
increases but at a moderate rate.
Galloping Inflation: A very high rate of inflation is called
galloping inflation. Inflation in the double or triple digit range of
20, 100 or 200 percent a year is labeled as galloping inflation.
Hyper Inflation: It takes place when prices shoot up at more than
three digit rate per annum. During the period of hyper inflation,
paper currency becomes worthless.
Demand Pull Inflation: A demand pull inflation is an inflation
created by the pressure of excess demand in the market. If for
some reason, there is an excess of demand over supply, price
tends to increase under this pressure of excess demand.
If aggregate demand exceeds aggregate supply, there will be an
upward pressure on the aggregate price level.
The demand pull
factors (e.g. rise in
population or
national income in a
country) cause a
Price S rightward shift in the
demand curve from
D 0 to D 1. Now given
P1
the supply curve SS,
the equilibrium
D1
P0 product price will
increase form OP 0 to
D0 Op1.
Quantity
Causes of Inflation
Increase in public spending
Deficit financing
Increased velocity of circulation: The rate at which money changes
hands among the people.
Population growth
Hoarding
Genuine shortages
Exports: creates shortage
Trade Unions: By demanding higher wages
Tax reduction: Leaves more money in people’s hands
Increasing cost of production
Post war economy
Effects of Inflation