Inflation

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Inflation

  1. 1. InflationInflationBy Umar AzamBy Umar Azam
  2. 2. Inflation Inflation is aInflation is a Rise in the General Price LevelRise in the General Price Level of goodsof goods and services in an economy over aand services in an economy over a period of time.period of time. When the price level rises, each unit ofWhen the price level rises, each unit of currency buys fewer goods and services i.e.currency buys fewer goods and services i.e. the Value of Money falls.the Value of Money falls. A chief measure of price inflation is theA chief measure of price inflation is the inflation rateinflation rate..
  3. 3. 1. CREEPING INFLATION (0%-3%)1. CREEPING INFLATION (0%-3%) 2. WALKING INFLATION (3% - 7%)2. WALKING INFLATION (3% - 7%) 3. RUNNING INFLATION3. RUNNING INFLATION (10% - 20%)(10% - 20%) 4. HYPER INFLATION4. HYPER INFLATION (20% & above)(20% & above) STAGES OF INFLATION
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  5. 5. Types of Inflation 1. Demand Pull Inflation1. Demand Pull Inflation 2. Cost Push Inflation2. Cost Push Inflation
  6. 6. What’s the differenceWhat’s the difference?? The difference between these twoThe difference between these two types of inflation is found in theirtypes of inflation is found in their causes.causes. Both have the same effectsBoth have the same effects (increasing price level), but they are(increasing price level), but they are cause d by diffe re nt thing s.cause d by diffe re nt thing s.
  7. 7. Causes of Inflation
  8. 8. Aggregate supplyAggregate supply is the total volume of goods andis the total volume of goods and services produced by an economy ofservices produced by an economy of a country at a given price level.a country at a given price level. Aggregate demandAggregate demand is the total volume of goods andis the total volume of goods and services demanded by the country.services demanded by the country. Basic Terms:Basic Terms:
  9. 9. Demand-Pull Inflation Demand-pull inflation occurs when the level ofDemand-pull inflation occurs when the level of aggregate demand increasesaggregate demand increases faster than thefaster than the underlying level of supply.underlying level of supply. When the people as a whole get more money theyWhen the people as a whole get more money they are able to pay more for goods and servicesare able to pay more for goods and services (unless more goods and services are produced)(unless more goods and services are produced) "too much money chasing too few goods""too much money chasing too few goods"
  10. 10. Pricelevel/inflationPricelevel/inflation Output / employmentOutput / employment ADAD1 AD2 AS Demand-Pull Inflation curveDemand-Pull Inflation curve when there is a rightward shift in the demandwhen there is a rightward shift in the demand curve we say that its demand pull inflation.curve we say that its demand pull inflation. QQ11 QQ22 PP11 PP22 Rightward shiftRightward shift
  11. 11. Factors for Increase in DemandFactors for Increase in Demand Increase in Money SupplyIncrease in Money Supply Reduction in TaxesReduction in Taxes Repayment of Past Internal DebtRepayment of Past Internal Debt Increase in ExportsIncrease in Exports Increase in IncomeIncrease in Income Depreciation of local exchangeDepreciation of local exchange ratesrates
  12. 12. Cost-Push Inflation Cost-push inflation occurs when there is aCost-push inflation occurs when there is a decrease/disruption in thedecrease/disruption in the aggregate supplyaggregate supply of goods and services due to increase in theof goods and services due to increase in the cost of production.cost of production. Cost-push inflation basically means thatCost-push inflation basically means that prices have been "pushed up" by increasesprices have been "pushed up" by increases in costs of any of the four factors ofin costs of any of the four factors of production (labor, capital, land orproduction (labor, capital, land or entrepreneurship)entrepreneurship)
  13. 13. Cost-Push Inflation curveCost-Push Inflation curve When there is a shift in the supply curveWhen there is a shift in the supply curve backwards we say that inflation is cost pushbackwards we say that inflation is cost push AS2 Pricelevel/inflationPricelevel/inflation Output / employmentOutput / employment ADAD AS1 QQ11QQ22 PP11 PP22 backward shiftbackward shift
  14. 14. Stagflation When rise in price level and fall inWhen rise in price level and fall in employment occurs simultaneously,employment occurs simultaneously, then it is calledthen it is called stagflationstagflation.. It is the worst type of inflation.It is the worst type of inflation.
  15. 15. Factors for Increase in CostFactors for Increase in Cost  Increase in cost of raw materialsIncrease in cost of raw materials  Increase in TaxesIncrease in Taxes  Increase in Rent, Wages, BillsIncrease in Rent, Wages, Bills  Shortage of suppliesShortage of supplies  Natural calamitiesNatural calamities  Increase in exportsIncrease in exports
  16. 16. Effects of InflationEffects of Inflation
  17. 17. Inflation can haveInflation can have PositivePositive andand NegativeNegative effects on an economy.effects on an economy.
  18. 18. Negative effects:Negative effects: 1.1.Loss in stability in the real value of money.Loss in stability in the real value of money. 2.2.Uncertainty about future inflation may discourageUncertainty about future inflation may discourage investment and saving.investment and saving. 3.3.High inflation may lead toHigh inflation may lead to sho rtag e s o f g o o dssho rtag e s o f g o o ds if consumersif consumers beginbegin ho ardingho arding out of concern that prices will increase in theout of concern that prices will increase in the future.future. Positive effects:Positive effects: 1.1.Mitigation of economic recessions.Mitigation of economic recessions. 2.2.Debt relief by reducing the real level of debt.Debt relief by reducing the real level of debt.
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