Inflation is a quantitative measure of the rate at which the average price level of

a basket of selected goods and services in an economy increases over a period of

time. It is the constant rise in the general level of prices where a unit of currency
buys less than it did in prior periods. Often expressed as a percentage, inflation
indicates a decrease in the purchasing power of a nation’s currency.
Inflation is classified into three types: Demand-Pull inflation, Cost-Push inflation,
and Built-In inflation.
As prices rise, a single unit of currency loses value as it buys fewer goods and
services. This loss of purchasing power impacts the general cost of living for the
common public which ultimately leads to a deceleration in economic growth.
Concept & Theory:
The consensus view among economists is that sustained inflation occurs when a
nation's money supply growth outpaces economic growth.
Monetarists say that a rapid increase in money supply leads to a rapid increase in
inflation. Money growth that surpasses the growth of economic output results in
inflation, as there is too much money behind too little production of goods and
services. In order to curb inflation, money growth must fall below growth in
economic output.

This premise leads to how monetary policy is administered. Monetarists believe

that money supply should be kept within an acceptable bandwidth so that levels of
inflation can be controlled. Thus, for the near term, most monetarists agree that an
increase in money supply can offer a quick-fix boost to a staggering economy in
need of increased production. In the long term, however, the effects of monetary
policy are still blurry.

Less orthodox monetarists, on the other hand, hold that an expanded money
supply will not have any effect on real economic activity (production, employment
levels, spending and so forth).

Monetarist View
The monetarists focus on the function of money which is the grounds of demand-
pull inflation. The quantity theory of money explores that inflation is nothing but the
pecuniary incident which is emerged by the monetary expansion. The quantity
theory of money recognizes that there prevails a one to one association between
money supply and price level. The theory employs the familiar identity of Fisher’s
exchange equation.
Fisher’s exchange equation demonstrates by the following equation.
MV=PY
Where, the M=Total dimensions of the money supply
V=Velocity of money
P=Price level
Y=True output level
By assuming that V and Y are exogenously determined, the price level varies with
money supply proportionately, and the money supply doesn’t affect the real output.
2.1.2. Friedman’s View
Modern quantity theorists followed by Friedman said that "Inflation is forever and
all over a monetary phenomenon that derives from fast growth in the amount of
money than in total income.' He points out that change in the money supply will
effort effectively throughout to be the main reasons for change in nominal income.
He discusses output level will go first through monetary expansion if the nominal
income of the public rises.
2.1.3. Keynsian View
The eminent economist John Maynard Keynes encountered the monetarist's view.
Based on the short-term analysis he argues that the increase in aggregate demand
boosts up demand-pull inflation. The main source of rapid inflation is the gap
between aggregate demand and aggregate supply. According to Keynesian
theory, prices are determined exogenously, or nonmonetary forces and output are
to be variable which is resolute by the change in investment expenditure.
2.1.4. Structuralist View
The well-known economist's Myrdal and Straiten were generalized this theory as
an explanation of inflation in the developing countries. They investigated that the
existence of market imperfections and structural imbalances in some sectors of
developing countries create the mismatch between demand and supply which
raises inflation. As a result, fiscal and monetary actions can't solve this economic
difficulty.