Inflation
Inflation
Inflation
ON
INFLATION
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INTRODUCTION
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HOW INFLATION IS MEASURED?
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TYPES OF INFLATION
Subsequently, when
either the prices of
goods or services or the
supply of money rises;
this is considered as inflation. Depending on the
characteristics and the intensity of inflation, there are
several types, namely.
- Creeping inflation
- Trotting inflation
- Galloping inflation
- Hyper inflation
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Another type of inflation is the galloping inflation, where
the rate of inflation is increasing at a noticeable speed
and at a remarkablerate, usually from 10-20 percent.
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CAUSES OF INFLATION
Inflation comes in different forms and those at are
familiar withthe economic matters would observe that
there are trends in theway that prices are moving
gradual and irregular in relation toaggregate sections of
the economy. This suggest that there ismore than one
factor that causes inflation and as differentsections of
the economy develop it gives rise to different types
inflationary periods. The main causes of inflation are:
- Demand-pull Inflation
- Cost push Inflation
- Monetary inflation
- Structural inflation
- Imported inflation
DEMAND-PULL INFLATION
COST-PUSH INFLATION
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MONETARY INFLATION
STRUCTURAL INFLATION
IMPORTED INFLATION
EFFECT OF INFLATION
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commodities creatingshortages of the hoarded
objects).
Distortion of relative prices (usually the prices of
goods gohigher, especially the prices of
commodities).
Increased risk - Higher uncertainties (uncertainties in
business always exist, but with inflation risks are
very high, because of the instability of prices).
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cash decrease in value day after day, so people tend
to spend the cash on something else).
Illusions of making profits (companies will think they
weremaking profits while in reality they’re losing
money if they don’t take into consideration the
inflation rate when calculating profits).
Causes an increase in tax bracket (people will be
taxed a higher percentage if their income increases
following an inflation increase).
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"POSITIVE" EFFECTS OF INFLATION ARE:
The first three effects are only positive to a few elite, and
therefore might not be considered positive by the
general public.
MONETARY POLICY
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Inflation is primarily a monetary phenomenon. Hence,
the most logical solution to check inflation is to check the
flow of money supply by devising appropriate monetary
policy and carefully implementing such measures. To
control inflation, it is necessary to control total
expenditures because under conditions of full
employment, increase in total expenditures will be
reflected in ageneral rise in prices, that is, inflation.
Monetary policy is used to control inflation and is based
on the assumption that a rise in prices is due to excess of
monetary demand for goods and services by the
consumers/households because easy bank credit
is available to them. Monetary policy, thus, pertains to
banking and credit availability of loans to firms and
households, interest rates, public debt and its
management, and the monetary standard. Monetary
management is aimed at the commercial banking
systems, and through this action, its effects are primarily
felt in the economy as a whole. By directly affecting the
volume of cash reserves of the banks, can regulate the
supply of money and credit in the economy, thereby
influencing the structure of interest rates and the
availability of credit. Both these, factors affect the
components of aggregate demand and the flow of
expenditure in the economy.
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The central bank’s monetary management methods, the
devicesfor decreasing or increasing the supply of money
and credit for monetary stability is called monetary
policy. Central banks generally use the three quantitative
measures to control the volume of credit in an economy,
namely:
1. Raising bank rates
2. Open market operations and
3. Variable reserve ratio
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In a developing economy there is always an increasing
need for credit. Growth requires credit expansion but to
check inflationthere is need to contract credit. In such an
encounter, the best course is to resort to credit control,
restricting the flow of credit into the unproductive,
inflation-infected sectors and speculative activities, and
diversifying the flow of credit towards the most
desirable needs of productive and growth-inducing
sector.
FISCAL MEASURES
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cash surplus in the budget. Keynes, however, suggested a
programme of compulsory savings, such as deferred
pay as an anti-inflationary measure. Deferred pay
indicates that the consumer defers a part of his or her
wages by buying savings, bonds (which, of course, is a
sort of public borrowing), which are redeemable after a
particular period of time, this is some times called forced
savings. Additionally, private savings have a strong
disinflationary effect onthe economy and an increase in
these is an important measure for controlling inflation.
Government policy should therefore, include devices for
increasing savings. A strong savings drive reduces the
spendable income of the consumers, without any
harmful effects of any kind that are associated with
higher taxation. Furthermore, the effects of a large
deficit budget, which is mainly responsible for inflation,
can be partially offset by covering the deficit through
public borrowings. It should be noted that it is only
government borrowing from non-bank lenders that has a
disinflationary effect. In addition, public debt may be
managed in such a way that the supply of money in the
country may be controlled. The government should avoid
paying back and of its past loans during inflationary
periods, in order to prevent an increase in the circulation
of money. Anti-inflationary debt management also
includes cancellation of public debt held by the
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central bank out of a budgetary surplus.
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“rationing involves a great deal of waste, both of
resources and of employment.”
DEFLATION
It is a condition of falling prices accompanied by a
decreasing level of employment, output and income.
Deflation is just the opposite of inflation. Deflation occurs
when the total expenditure of the community is not
equal to the existing prices. Consequently, the supply of
money decreases and as a result prices fall. Deflation can
also be brought about by direct contractions in spending,
either in the form of a reduction in
government spending, personal spending or investment
spending. Deflation has often had the side effect of
increasing unemployment in an economy, since the
process often leads to a lower level of demand in the
economy. However, each and every fall in price cannot
be called deflation. The process of reversing
inflation without either creating unemployment or
reducing outputis called disinflation and not deflation.
Therefore, some perceive deflation as under
employment phenomenon.
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DISINFLATION
REFLATION
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Reflation is a situation of rising prices, which is
deliberately undertaken to relieve a depression. Reflation
is a means of motivating the economy to produce. This is
achieved by increasing the supply of money or in some
instances reducing taxes, which is the opposite of
disinflation. Governments can use economic policies such
as reducing taxes, changing the supply of money or
adjusting the interest rates; which in turn motivates the
country to increase their output. The situation is
described assemi-inflation or reflation.
STAGFLATION
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unfavorable supply, such as an increase in the price of oil
in an oil importing country, which tends to raise prices
at the same time that it slows the economy by making
production less profitable. In the 1970's inflation and
recession occurred indifferent economies at the same
time. Basically, what happened was that there was plenty
of liquidity in the system and people were spending
money as quickly as they got it because prices
were going up quickly. This gave rise to the second
reason for stagflation.
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