2. INFLATION • Inflation is the rising price of goods and
services over time. It's an economics term
that means you have to spend more to fill
your gas tank, buy a gallon of milk or get a
haircut. Inflation increases your cost of
living.
• Inflation leads to a decline in the value of
money. “Inflation means that your money
won’t buy as much today as you
could yesterday.”
• As prices rise, your money buys less.
4. Types of Inflation:
• Creeping Inflation
Creeping or mild inflation is when prices rise 3 percent
a year or less. According to the Federal Reserve, when
prices increase 2 percent or less it benefits economic
growth.
• Walking Inflation
This type of strong inflation is between 3-10 percent a
year. It is harmful to the economy because it heats up
economic growth too fast.
5. • Galloping Inflation:
When inflation rises to 10 percent or more, it
wreaks absolute havoc on the economy. Money
loses value so fast that business and employee
income can't keep up with costs and prices.
• Hyperinflation:
Hyperinflation is when prices skyrocket more than
50 percent a month. It is very rare.
Examples : most examples of hyperinflation have
occurred only when governments printed money
to pay for wars. Such as Germany in the 1920s,
Zimbabwe in the 2000s, and Venezuela in the
2010s. The last time America experienced
hyperinflation was during its civil war.
6. Effects of inflation
•Inflation is seen to have economic costs.
These include:
•Decline in value of savings
•Uncertainty for business leading to less
investment.
•A decline in the competitiveness of exports (if
inflation higher than other countries.)
7.
8. 1. Demand-pull inflation
• If the economy is at or close to full employment, then
an increase in AD (Aggregate Demand) leads to an
increase in the price level. As firms reach full
capacity, they respond by putting up prices leading
to inflation. Also, near full employment with labour
shortages, workers can get higher wages which
increase their spending power.
• AD can increase due to an increase in any of its
components C+I+G+X-M
10. 2. Cost-push inflation
•If there is an increase in the costs of firms, then
businesses will pass this on to consumers as
price rise. There will be a shift to the left in the
AS (Aggregate Supply).
•Cost-push inflation can be caused by many
factors
14. 1. Monetary Measures:
• In monetary policy, the central bank reduces money supply in the
market, which, in turn, controls inflation. Apart from this, the
central bank reduces the credit creation capacity of commercial
banks to control inflation.
• (a) Rise in Bank Rate:
• The bank rate is the rate at which the commercial bank gets loans
and advances by the central bank. The increase in the bank rate
results in the rise of rate of interest on loans for the public. This
leads to the reduction in total spending of individuals.
• Current BANK rate is 6.75 (Dec 2019)
15. (b) Direct Control on Credit
Creation:
• The central bank directly reduces the credit control capacity of
commercial banks by using the following methods:
• (i) Performing Open Market Operations (OMO):
• The central bank issues government securities to commercial banks and
certain private businesses.
• In this way, the cash with commercial banks would be spent on purchasing
government securities. As a result, commercial bank would reduce credit
supply for the general public.
16. (ii) Changing Reserve
Ratios:
• Involves increase or decrease in reserve ratios by the
central bank to reduce the credit creation capacity of
commercial banks. For example, when the central
bank needs to reduce the credit creation capacity of
commercial banks, it increases Cash Reserve Ratio
(CRR). As a result, commercial banks need to keep a
large amount of cash as reserve from their total
deposits with the central bank. This would further
reduce the lending capacity of commercial banks.
• Current CRR rate is 4 while SLR is 19.5 (Dec 2019).
18. •3. Price Control:
•Another method for ceasing inflation is
preventing any further rise in the prices of
goods and services. In this method, inflation
is suppressed by price control, but cannot
be controlled for the long term. In such a
case, the basic inflationary pressure in the
economy is not exhibited in the form of rise
in prices for a short time. Such inflation is
termed as suppressed inflation.
20. • A business cycle is a cycle of fluctuations in the Gross Domestic
Product (GDP) around its long-term natural growth rate. It explains
the expansion and contraction in economic activity that an economy
experiences over time. A business cycle is completed when it goes
through a single boom and a single contraction in sequence.
• The time period to complete this sequence is called the length of
the business cycle. A boom is characterized by a period of rapid
economic growth whereas a period of relatively stagnated economic
growth is a recession. These are measured in terms of the growth of
the real GDP, which is inflation adjusted.
21. Definition: • Prof. Haberler has said –“The business
cycle in the general sense may be
defined as an alternation of period of
prosperity and depression of good and
bad trade.”
• According to Keynes –“A trade cycle is
composed of period of good trade
characterised by rising prices and low
unemployment percentages, altering
with periods of bad trade characterised
by falling prices and high unemployment
percentages.”
22. Characteristics
of Business
Cycle
Cyclical fluctuations are wave like shifts
Fluctuations are recurring in nature
They are non-periodic or uneven. In other words the
peaks and channel do not occur at usual intervals.
They transpire in such total variables as productivity,
earnings,employment and prices.
These variables move at about the same period in the
same course but at diverse rates.
23. • The sturdy commodity industries experience associatively wide
fluctuations in productivity and employment but relatively small
variations in prices. On the other hand, non-durable commodity
industries experience relatively wide variations in prices but
associatively small variations in productivity and employment.
• Business cycles are not seasonal variations such as upswings in
retail trade during festive seasons.
• They are not secular trends such as long run growth or decline
in fiscal performance.
• Upswings and downswings are collective in their effects.
24. Types of Business Cycles
• The Short Kitchin Cycle
This is also termed as the minor cycle which is of just about forty five months
gap. came to the termination on the basic of his research that a major cycle is
composed of two or three minor cycles of forty five months.
• The Long Jugler Cycle
This cycle is also termed as the major cycle. It is defined “as the fluctuation of
business presentation among successive crises.” Clement Jugler, French
economist presented those periods of prosperity, crisis and liquidation
adopted each other always in the same order. Later economists have come to
the end that a Jugler cycle’s duration is on the average nine and a half years.
25. • The Very Long Kondratieff
N.D.Kondratieff, the Russian economist came to the conclusion
that there are longer waves of cycles of more than fifty years
duration made of six Jugler cycles. A very long cycle has come to
be known as the Kondratieff wave.
• Building Cycles
Another type of cycle associates to the construction of buildings
which is of fairly regular duration. Its duration is two fold that of
the major cycles and is on average of eighteen years duration.
Such cycles are related with the names of Warren and Pearson.
• Kuznets Cycle
Simon Kuznets propounded a new type of cycle the secular
swing of sixteen to twenty two years which is so propounded that
it dwarfs the seven to eleven years cycle into associated
insignificance. This has come to be known as the Kuznets cycle.
26. Stages of the Business C ycle
• 1 Expansion
The first stage in the business cycle is expansion. In this stage, there is an increase in
positive economic indicators such as employment, income, output, wages, profits,
demand, and supply of goods and services. Debtors are generally paying their debts on
time, the velocity of the money supply is high, and investment is high. This process
continues until economic conditions become favorable for expansion.
• 2 Peak
The economy then reaches a saturation point, or peak, which is the second stage of the
business cycle. The maximum limit of growth is attained. The economic indicators do not
grow further and are at their highest. Prices are at their peak. This stage marks the reversal
in the trend of economic growth. Consumers tend to restructure their budget at this point.
27. • 3 Recession /Deflation
The recession is the stage that follows the peak phase. The demand for goods and services
starts declining rapidly and steadily in this phase. Producers do not notice the decrease in
demand instantly and go on producing, which creates a situation of excess supply in the
market. Prices tend to fall. All positive economic indicators such as income, output, wages, etc.
consequently start to fall.
• 4 Depression
There is a commensurate rise in unemployment. The growth in the economy continues to
decline, and as this falls below the steady growth line, the stage is called depression.
28. • 5 Trough
In depression stage, the economy’s growth rate becomes negative. There
is further decline until the prices of factors, as well as the demand and
supply of goods and services, reach their lowest. The economy eventually
reaches the trough. This is the lowest it can go. It is the negative saturation
point for an economy. There is extensive depletion of national income and
expenditure.
• 6 Recovery
After this stage, the economy comes to the stage of recovery. In this
phase, there is a turnaround from the trough and the economy starts
recovering from the negative growth rate. Demand starts to pick up due
to the lowest prices and consequently, supply starts reacting, too. The
economy develops a positive attitude towards investment and
employment and hence, production starts increasing. This completes one
full business cycle of boom and contraction.
• The extreme points are the peak and the trough.
