The document discusses inflation, its definition as a general increase in price levels over time, and its causes. It identifies three main types of inflation: demand-pull inflation from increases in spending, cost-push inflation from drops in supply, and built-in inflation from past price and wage increases creating a spiral. The document was written by Ajeet Kumar Pandey in the batch SB2 on 08/01/2011 for an assignment on inflation and its causes.

1. Name: Ajeet Kumar Pandey
Batch : SB2
Date: 08/01/2011
INFLATION AND ITS CAUSES
Inflation: It is defined as the increase in the general price level of the goods and services in the economics
over a period of time. When the general income level of the population is increases then the purchasing
power of each consumer will increase as a result increases in the demand of goods and services on the other
hand the supply of those goods and services are limited so, producers are forced to increase the price of those
goods and service to achieve the equilibrium position in the economics.
Inflation's effects on an economy are various and can be both positive and negative. Negative effects of
inflation lead to decrease in the real value of money and other monetary items over a particular time period,
uncertainty over future inflation may discourage investment and savings, and high inflation may lead to
shortages of goods if consumers begin hoarding out of concern that prices will increase in the future.
CAUSES:
Keynesian economic theory said that change in supply of money do not effect directly affect prices,
the supply of money is a major, but not the only, cause of inflation.
There are three major causes and types of inflation are as follow:
1) DEMAND PULL INFLATION: Demand-pull inflation is caused by increases in aggregate
demand due to increased private and government spending, etc. When the demand of goods
and services pulled more than its aggregate Demand in the economy than for full filling
those requirement economy has to increase the quantity of money on the other hand
inflation is constructive to a faster rate of economic growth since the excess demand and
favorable market conditions will cause or leads to high investment and expansion.

2. 2) COST PUSH INFLATION: Cost-push inflation, also called "supply shock inflation," is
caused by a drop in aggregate supply (potential output). This may be due to natural disasters,
or increased prices of inputs. For example, a sudden decrease in the supply of oil, leading to
increased oil prices, can cause cost-push inflation. Producers for whom oil is a part of their
costs could then pass this on to consumers in the form of increased prices. If we take
another examples than we can take the scenario of onion, sugar price suddenly change which
can cause a result of increase in the price of supported works like restaurants etc.
3) BUILT IN INFLATION: Built-in inflation is induced by adaptive expectations, and is often
linked to the "price/wage spiral". It involves workers trying to keep their wages up with
prices (above the rate of inflation), and firms passing these higher labor costs on to their
customers as higher prices, leading to a 'vicious circle'. Built-in inflation reflects events in the
past, and so might be seen as hangover inflation. On the other hand if we say that if a wage
of a labor increase than the cost of production increase as a result price of goods and
services increase for customer and those worker or labor are directly or indirectly the
customer whom wages was initially increases as a result the there is a positive relation
between wages and the price of goods and services.
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