INFLATION

INFLATION

• A persistent increase in the average

price level in the economy.
– It is measured by the inflation rate
– Inflation is the most common phenomenon
associated with the price level.
– Inflation is one of two key macroeconomic
problems. The other is unemployment.
 Inflation
• According to Websters “An increase in the amount of
currency in circulation, resulting in a relatively sharp
and sudden fall in its value and rise in prices: it may
be caused by an increase in the volume of paper
money issued or of gold mined, or a relative increase
in expenditures as when the supply of goods fails to
meet the demand.
 INFLATION

Inflation: Inflation is defined as a rise in the general price level.

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. Often expressed as a
percentage.
Inflation indicates a decrease in the purchasing power of a nation's
currency.
Causes of Inflation
• Changes in money supply, the national debt
• Changes in disposable income, demand pull effect, cost push effect
• Changes in business and consumer expenditure
• Changes in demand of goods and services and exchange rates
• Increase in government expenditure
• Deficit financing
• Inadequate rise in industrial production
 Types of inflation
Demand-pull inflation: Too much money chasing too few goods.
It occurs when aggregate demand for goods and services in an
economy rises more rapidly than an economy's productive
capacity. One potential shock to aggregate demand might come
from a central bank that rapidly increases the supply of money.
Cost-push inflation: Factors of production increase their prices.
It occurs when prices of production process inputs increase. Rapid
wage increases or raising raw material prices are common causes
of this type of inflation. Rising energy prices caused the cost of
producing and transporting goods to rise.
Stagflation: Stagnation (Economy is not growing) + Inflation

Deflation – Opposite to inflation

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