Inflation refers to a sustained increase in the general price level in an economy. It occurs when aggregate demand exceeds aggregate supply, resulting in excess demand that pulls prices up. Key causes of inflation include increases in money supply, costs of production like wages and materials, and excess demand for goods and services. The inflationary gap model shows inflation occurring when anticipated expenditures exceed available output. Measures to control inflation target monetary and fiscal policies as well as output expansion, wage and price controls.

3. Definition
According to Sir J.M. Keynes,
“The True Inflation Refers To The
Rise In The Price Levels After The
Point Of Full Employment.”

4. Features Of Inflation
• Inflation is a dynamic process.
• ​This process is not recognizing in its initial ​stage. A stage increase in price level is
not​ termed as inflation instead of continue​.Increase in price is inflation.
• ​Increase in price always takes place in ​broader area, means to say, inflation​
generally causes increase in prices of al​l commodities, not only in prices of so​me
special goods.
• ​The main characteristics of inflation is ​surplus of demand over supply
• ​Inflation hits the middle and poor class of ​society It results in decline the
purchasing​ power of consumers.​

5. PROF. D.C. ROWAN
R(i) = p(f)
R(i)= the rate of inflation
P = the price level
F and (1-f)=the period of calendar time of observation
= the change to be observed
p(1-F)
* 100

6. Cause Of Inflation
• As inflation is a continuous rise in the general price level, it is
mainly caused by:
 The increase in demand, and/or.
 The increase in cost of production.
 Thus, the two important causes of inflation.
 Demand-Pull Inflation
 Cost-Push Inflation

7. Demand Pull Inflation
 Demand-Pull Inflation is also called Excess-Demand Inflation.
 Demand-Pull Implies that Demand for Goods and Services is Pulled
Above the Capacity of the Economy to Produce Goods and Services in
a Given Period.
 It refers to that types of inflation which arises due to aggregate demand
for goods and services being more than the supply of goods and
services.

8. Diagram
Q
P2
P1
P
Y
0 X
S
E2
E1
E
D2
D1
D D2
D1
D
S
P
R
I
C
E
L
E
V
E
L
REAL OUPUT

9. Factors Responsible For The Demand Pull Inflation
Increase In
Money Supply
Size Of The
Population
Credit
Creation
Black Money Export Trade Public Dept.

10. Cost Push Inflation
 Cost- push inflation refers to the rise in the price level due to a
rise in cost of production.
 Contrary to demand pull inflation, some economists are of the
opinion that a rise in cost of production is the root cause for
inflation and this inflation is also termed as “ cost inflation.”
 The price level rises due to the rise in the cost of production,
when the factor owners tend to raise factor prices or increase
their share in total output.

11. Diagram
Y
P4
P3
P2
P1
P
S
D2
D1
D G
F
S2
S1
S
Q Q1 Q2
D1
D2
D
X
REAL OUPUT
P
R
I
C
E
L
E
V
E
L
E2
E1
E
O

12. Factors Responsible For The Cost Push Inflation
Higher
Wages
Material
Costs
Profit
Margin
Natural
Calamities
Other
Factors

13. Inflationary Gap:
• In order to analyse the pressure of inflation, the concept of inflationary gap
was introduced by J.M. Keynes in his pamphlet “How to pay for the war.”
• The inflationary gap refers to an excess of anticipated aggregate
expenditure out of the disposal income of the people over the money value of
available aggregate output of goods and services at their base-year or
constant prices.
• In the simple words, the inflationary gap is the difference between the
aggregate money demand for the consumer goods and services and their
supply.

14. Diagram:-
F
R
0 Y Y1 Y2
45
E2
C1+I1+G1
C+I+G
C
Y=E
F1E1
E
INCOME (Y)
E
X
P
E
N
D
I
T
U
R
E
(E)
Y
X

15. • Inflation is concerned with –
• 1)Rapidly rise in the prices of goods and services, and
• 2)Consequently fall in the value of money
Effects Of Inflation
Effects Of Inflation
On Production On Distribution On Socio-Political Stability
Decrease in value of money Wages and Salary earners Class-Conflict
Decrease in value foreign investment Fixed income groups Political-instability
Hoarding of essential goods Entrepreneurs

16. • Inflation is concerned with –
• 1)Rapidly rise in the prices of goods and services, and
• 2)Consequently fall in the value of money
Measures to Control Inflation
Measures to Control Inflation
Money measures Fiscal measures Miscellaneous measures
Bank Rate Government Expenditure Expansion on Output
Government Securities Taxation Wage Policy
Cash Reserve Ration Public Borrowing Price Control and Rationing

17. Deflation:
• On the contrary to inflation, deflation is a situation occurs with a continuous fall in
the general level of prices.
• A.C Pigou defines the deflation as…….
• “A state of falling prices which occurs at the time when the output of goods and
services more rapidly than the volume of money income in the economy.”
• After the 1930’s depression, deflation has become very rare situation to the world.
Usually, deflation may results in:
1. A continuous fall in the general price level,
2. An increase in the value of money,
3. An increase in the unemployment,
4. A decline in effective demand, and
5. The adverse effects on the economy.

18. Stagflation
• Stagflation refers to the situation when a high inflation
occurs along with high unemployment.
• The term ‘stagflation’ was coined in the seventies (1973)
in several developed countries, when the rapid increase in
oil prices lead to sharp increases in the prices of
manufactured goods, and the real GNP declined while the
rate of unemployment increased.

19. Diagram
AS1
AS
AD
AD1
AS1
AS
E1
E
Q1 Q
P1
P
0 X
Y
REAL OUPUT
P
R
I
C
E
L
E
V
E
L