1) Inflation Caused by increasing in aggregate demand.
1) Increase in money supply.
2) Increase in the demand for goods by
3) Increase the income of various factor
Increase in cost of production.
Entrepreneurs due to their monopoly
position raise the profit margin on
Country covers the budget deficits through bank borrowings and
creating now money.
Purchasing power of community increases without a increase in
production of goods.
Inflation is caused by too rapid increase in money supply
Rate of inflation which majority of the individuals believe will occur.
Rate of inflation which comes as a surprise to majority of individuals.
2)Anticipated V/s Unanticipated
(1) General prices level increases upto a rate of 2% per annum.
(2) It is generally considered a necessary condition of economic
The price rise is around 5% annualy.
The price increases about 8 to 10% per annum.
(1) It starts after the level of full employment is reached.
(2) Price level rises very rapidly within a short period.
Inflationary process in which prices are permitted to rise
without being suppressed by government price control or
(1) Govt. makes efforts to check and control the rise in price
level through price control and rationing.
(2) Suppressed inflation results many evils such as black
marketing, hoarding, corruption and profiteering.
(1) General Price level raises partly due to an increase In cost
(2) And partly due to rise in supply of money before the full
employment stage is reached.
(1) Economy reaches the level of full employment.
(2) Increase in money supply will result in the rise in price
level without any increase in output and employment.
While inflation represents an
overall upward price
movement of goods and
services, deflation acts
adversely. We take a look at
the basics of both.
Inflation is a rise in
the general level of
prices of goods and
services in an
economy over a
period of time
- An increase in the general level of prices.
- decrease in the purchasing power of the
- High or unpredictable inflation rates are
regarded as harmful to an overall economy.
- make it difficult for companies to budget or plan
- affect the balance of trade.
- negative impacts to trade from an increased
instability in currency exchange prices caused
by unpredictable inflation.
Deflation is a decrease in
the general price level of
goods and services.
Deflation occurs when
the inflation rate falls
below 0% (a negative
Deflation is a problem in a modern economy because
it may aggravate recessions and lead to a deflationary
The effects of deflation are:
1 Decreasing nominal prices for goods
2 Increasing buying power of cash
money and all assets denominated in
3 May decrease investment and
lending if cash holdings are seen as
4 Benefits recipients of fixed incomes.