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Unit-II
INFLATION & DEFLATION
Rise in Price + Fall in Value of Money
WhenDemandIncreasesor whenSupply
Decreases= INFLATION
How does inflation occur???
• Demand-pull inflation results in higher prices because
consumers want to buy more goods and services than producers
supply.
• Thus demand pulls up the Price
An inflation that starts with an increase in costs is called cost-push
inflation.
Reasons:
1. An increase in the money wage rate
2. An increase in the money price of raw materials, such as oil
IncreaseinMoneySupply bytheCentralBankalsoleadsto
Inflation
Impact of Inflation on the Economy
Impact of Inflation
on Consumers
 Inflation erodes
purchasing
power.
 Disturbs the
Consumers
Budget.
Impact of Inflation
on Farmers
• Huge Gainers
during Inflation.
• However it’s a
short term
phenomena
which cannot be
assured in the
long run.
• This is because
agriculture
dependent on
the monsoon.
Impact of Inflation
on Businessmen
• During inflation, the
producers and
businessmen gain in the
short period.
• Usually the cost of
production does not rise
as fast as the price of
their product and so
there is high margin of
profit.
• However in the long run
as the price level goes
on increasing, the
consumption for their
product would fall.
• The reduced
consumption will
ultimately rise the cost of
production per unit and
reduce the profits.
Role of
Government
At one end the Govt. is
committed to take the
economy to higher
levels of economic
growth by encouraging
production.
On the other end, the
Govt. is duty bound to
see that the tax payers
money is not eroded.
So Govt. acts as a
balancing force between
the consumers and
producers
Inflation related Concepts
 The general
prices of goods
and services of
an economy falls
for a significant
period of time.
 In other words,
your money
becomes worth
more and you
can buy more
goods and
service with it
than before.
Cause of Deflation…..
Effects of Deflation..
Phillips Curve
What is Phillips Curve all about….
• The Phillips curve given by A.W. Phillips
shows that there exist an inverse
relationship between the rate of
unemployment and the rate of increase in
nominal wages.
• A lower rate of unemployment is
associated with higher wage rate or
inflation, and vice versa. In other words,
there is a tradeoff between wage inflation
and unemployment.
• Reason: during boom, demand for labour
increases. Due to greater bargaining power
of the trade union, wage increases.

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Inflation deflation

  • 2. Rise in Price + Fall in Value of Money
  • 5. • Demand-pull inflation results in higher prices because consumers want to buy more goods and services than producers supply. • Thus demand pulls up the Price
  • 6. An inflation that starts with an increase in costs is called cost-push inflation. Reasons: 1. An increase in the money wage rate 2. An increase in the money price of raw materials, such as oil
  • 8. Impact of Inflation on the Economy
  • 9. Impact of Inflation on Consumers  Inflation erodes purchasing power.  Disturbs the Consumers Budget.
  • 10. Impact of Inflation on Farmers • Huge Gainers during Inflation. • However it’s a short term phenomena which cannot be assured in the long run. • This is because agriculture dependent on the monsoon.
  • 11. Impact of Inflation on Businessmen • During inflation, the producers and businessmen gain in the short period. • Usually the cost of production does not rise as fast as the price of their product and so there is high margin of profit. • However in the long run as the price level goes on increasing, the consumption for their product would fall. • The reduced consumption will ultimately rise the cost of production per unit and reduce the profits.
  • 12. Role of Government At one end the Govt. is committed to take the economy to higher levels of economic growth by encouraging production. On the other end, the Govt. is duty bound to see that the tax payers money is not eroded. So Govt. acts as a balancing force between the consumers and producers
  • 13.
  • 14.
  • 15.
  • 16.
  • 18.  The general prices of goods and services of an economy falls for a significant period of time.  In other words, your money becomes worth more and you can buy more goods and service with it than before.
  • 21.
  • 22.
  • 24. What is Phillips Curve all about….
  • 25. • The Phillips curve given by A.W. Phillips shows that there exist an inverse relationship between the rate of unemployment and the rate of increase in nominal wages. • A lower rate of unemployment is associated with higher wage rate or inflation, and vice versa. In other words, there is a tradeoff between wage inflation and unemployment. • Reason: during boom, demand for labour increases. Due to greater bargaining power of the trade union, wage increases.