VII.

Cause and Effects of the problem

 Cause
The report cited food and the upward adjustment of
administered petroleum and electricity prices, growth in money
supply, increased cost of production including wage rate and
exchange rate depreciation as major causes of inflation in
Bangladesh
 Inflation happens as a result of increasing and upward
adjustments.

 Effects
the monetary policy stance of the Bangladesh Bank for FY2012
assumed inflation control as its core objective, sacrificing
economic growth and investment prospects. CPD’s report states
that its present monetary policies supporting the restriction of
money supply have been of limited success as they are more
suited for demand-pull inflation. CPD’s report also says that this
may actually be counterproductive for other natures of inflation.
The central bank will have to acknowledge cost-push and
structural factors as the main causes of the current incremental
inflation and take appropriate measures to combat it.
 Inflation took place, citizens were affected, and the government
made it a top priority, sacrificing growth and investment
prospects in the process.
VIII. Effects of Economic Depression as mentioned in the case
 An increase in the general level of prices implies a decrease in
the purchasing power of the currency. That is, when the general
level of prices rises, each monetary unit buys fewer goods and
services. The effect of inflation is not distributed evenly in the
economy, and as a consequence there are hidden costs to some
and benefits to others from this decrease in the purchasing
power of money. 
 Each monetary unit buys fewer products and services as the
general level of prices rises. As previously said, the impact of
inflation is not evenly spread, so some people suffered the costs
while others benefited.
 Food inflation has a profound nexus with poverty and inequality.
Food inflation hits the poor hardest since their purchasing
power decreases due to the erosion in real income. From the
economics theory, when the real wage decreases demand for
labor increases. Therefore, employment should rise since there
is a tradeoff between inflation and unemployment. The result
depends on whether the employment effect of inflation
outweighs the real wage effect on poverty. But in Bangladesh
empirical data indicates that the real wage effect on poverty
outweighs the employment effect of inflation (Matin, 2011).There
exists a positive relationship between food inflation and poverty.
As the food inflation increases, the additional number of people
goes under the poverty line. The rising trend of food prices and
unemployment make the problem even more complex. As the
food prices are in the rising trend it may pave the way for more
people to go under the poverty line while they were above the
poverty line before the food price rises. In Bangladesh 40
percent of 160 million people live on less than one dollar a day.
A rapid population growth, rising food prices and unemployment
as well as the threat of climate change turns Bangladesh into a
more food insecure state.
 Inflation and unemployment are said to be a tradeoff here. As a
result, when prices rise, unemployment decreases. What
happened in Bangladesh is that the real wage effect exceeded
the employment effect of inflation, which is why those who were
previously above the poverty line are now below it.