Economics

Inflation
Inflation:
Meaning:
• Inflation is rise in general price level
• E.g. 1 kg of wheat in 2015 = 40 Rs.
1 kg of wheat in 2017 = 60 Rs.

• E.g. 100 Rs. could buy 10 Apples in 2015

• 100 Rs. can buy 5 Apples in 2017 because price has doubled

• WHEN THE PRICE LEVEL RISES, EACH UNIT OF CURRENCY BUYS FEWER
GOODS AND SERVICES
• inflation reflects a reduction in the purchasing power per unit of money
• When the supply of money increases the demand for goods and services increases and
price increases
Definitions of inflation:
• Prices rise mainly because of two reasons
increase in money supply
Increase in demand

• Crowther
“Inflation is a state in which value of money is falling i.e. prices are rising.“

• Coulborn
"Inflation is too much money chasing too few goods."
• Keynes
"An expansion of money supply leads to inflationary rise in price level."

• Hawtrey
"The state in which there is over-issue of currency, is called inflation."
Types of Inflation
Types of inflation
DEMAND-PULL INFLATION
• Demand-pull inflation is a term used to describe when prices rise because the aggregate
demand in an economy is greater than the aggregate supply.
• Reasons for Demand pull inflation:
Increase in Population
Increase in Money Supply
Foreign price increase
Cost Push inflation:
• Prices increase because of increase in cost of production
• Increase in Prices of raw material, wage rates, interest on loan, taxes, transportation cost
etc. will increase the cost of production.
• Since the cost increases the producers will increase the prices of their goods
• This increase is known as Cost-push inflation
Types of cost push inflation:
Cost push spiral:
Demand pull and cost push inflation: