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  1. 1.  Introduction Definitions Types of inflation Effects of Inflation Controlling inflation 2
  2. 2.  In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. 3
  3. 3.  According to Prof. Samuelson “inflation occurs when general level of prices & cost are rising over a period of time”. The overall general upward price movement of goods and services in an economy often caused by a increase in supply of money. 4
  4. 4.  Demand-pull inflation Cost-push inflation Built-in inflation 5
  5. 5.  Aggregate demand is higher than supply Inflation rises Employment rises GDP rises Cost - Push Inflation Cost of important goods or services rise No suitable alternative available Rising unemployment Falling GDP 6
  6. 6.  Results from past events and persists in the presence Results from previous increases in prices caused by demand-push or cost-pull. Example : Workers believe that prices will rise so they demand more wage. The higher wage will cause producers to raise their prices. Vicious circle 7
  7. 7.  Negative Effects:- Cost Push inflation : Can prompt employees to ask for more wages- Hoarding : Due to declining purchasing power of money- Social unrests and revolts- Hyperinflation : Out of control inflation leads to inability to supply goods- Allocation Efficiency/Menu costs : Buyers and sellers constantly have to change budgets- Instable business cycles : Borrowings are more leading to malinvestments finally leading to bankruptcy 8
  8. 8. - Inflation is misleading because it makes direct price comparisons from one year or era to another meaningless.- Inflation never lets up-is always there causing instability- When you dont adjust your prices in line with inflation, you have effectively lowered them.- Instability of the market with inflation- Financial planning difficult- Provokes employees to ask for more wages- People tend to save less as the prices of commodity are high 9
  9. 9. - Reflects at least some economic activity- More desirable than deflation- Leads increase in food prices of important items- Hotel industry profits decline as value of money goes down 10
  10. 10. There are broadly two ways of controlling inflation in an economy: 1). Monetary measures 2). Fiscal measuresMonetary Measures The most important and commonly used method to control inflation is monetary policy of the Central Bank. Most central banks use high interest rates as the traditional way to fight or prevent inflation. 11
  11. 11. II). Fiscal Measures Fiscal measures to control inflation include taxation, government expenditure and public borrowings.Fiscal measures used to control inflation include: (i) Increase in Taxes (ii)Increase in savings (iii)Surplus budgets 12