1.

Major outlines- content

2. What is inflation- definition

A persistent increase in the level of consumer prices or a persistent decline in the

purchasing power of money..."

In other words according to this definition inflation is when things getting more
expensive.

3. Features of inflation

 it is a process of rising prices

 it is initiated by some change which makes it impossible to satisfy the

whole demand which is forthcoming at existing prices, so that initial price
rises occur; and

 it is propagated by reactions of buyers or group of buyers to the initial

price rise so that further rise in prices is induced.

4. Inflationary process

Inflation represents a situation whereby the pressure of aggregate demand of

goods and services exceeds the aggregate supply of output (both being counted at
the process ruling at the beginning of a period). In such a situation prices rise is a
natural consequence.

Aggregate demand-it is the sum total of consumers’ spending on the current

goods and services, government spending on current goods and services and net
investment being contemplated by the entrepreneurs.

Aggregate supply- aggregate supply is the total supply of goods and services
produced by a national economy during a specific time period. It is the total
amount of goods and services in the economy.

5. Inflationary gap- it is a gap between money incomes of the community

and the available supply of output of goods and services.
6. types on inflation-creeping, walking, running, galloping and hyper
inflation, hyperinflation, stagflation, deflation
7. Demand pull and
This represents a situation where the basic factor at work is increased in demand
for resources either from government or the entrepreneurs or the households.
 The result is that the pressure of demand is such that it cannot be met by the
currently available supply of output.
Demand pull inflation is of two types:
1. Perishable goods and
2. Non-perishable goods

8. cost push inflation-

It is a situation where even though there is no increase in aggregate demand,
prices may still rise. This may happen if the costs, particularly the wage costs, go
on rising. The employers in a situation of high demand and employment are
more agreeable to concede to these wage claims, because they hope to pass on
these rise in costs to the consumers in the shape of higher prices.
9. Causes-
Increase in demand maybe due to:
 Increase in money supply
 Increase in disposable income
 Increase in community’s aggregate spending on consumption and
investment goods;
 Excessive speculation and tendency to hoarding and profiteering on the
part of producers and traders;
 Increase in foreign demand and exports;
 Increase in salaries, wages, rising cost of machinery and capital
equipments and essential raw materials; and
 Increase in population.

Decrease in supply maybe due to:

 Deficiency of capital equipments;
 Scarcity of complementary factors of production, e.g., skilled labor,
raw material or entrepreneurs.
 Increase in exports for earning the required foreign exchange;
 Decrease in imports owing to war or restrictions on imports
necessitated by adverse balance of payments and efforts to rectify it;
 Speculative hoarding by producers, traders and middlemen in
anticipation for further rise in prices;
 Drought, famine or any other natural calamity adversely affecting
agricultural production; and
 Prolonged industrial unrest resulting in reduction of industrial
production.
 10.effects on economy and on ourself
Effects of Inflation:
Inflation affects both the economy of a country and its social conditions, as well as the political and moral
lives of its inhabitants. However, the economic effects of Inflation are stated and described below:  

 Price inflation has immense effect on the Time Value of Money (TVM). This acts as a principal
component of the rates of interest, which forms the basis of all TVM calculations. The real or
estimated changes occurring in the rates of inflation lead to changes in the rates of interest as well.  

 Inflation exerts impact on the treasury of a nation as well.

 The most immediate effect of inflation is the decrease in the purchasing power of moneyand its
depreciation. Inflation influences the investments of a country. The Inflation-protected  Securities (IPSs)
may act as a guard against the loss in the purchasing power of the fixed-income investments (like fixed
allowances and bonds), which may occur during inflation.  

 Inflation changes the allocation of income. This exerts maximum effect on the  lenders than the
borrowers at the time of persisting inflation, because the loans sanctioned previously are paid back later
in the form of inflated rupees.

 Inflation leads to a handful of the consumers in making extensive speculation, to derive advantage
of the high price levels. Since some of the purchases are high-risk investments, they result in diversion of
the expenditures from regular channels, giving birth to a few structural unemployments.

11. how is inflation measured…..wholesale price index, consumer price

index, producer price index, service price index
12.why is inflation bad…disadvantages
Why is inflation bad?
Inflation is regarded as a bad process because it
leads to distortions and problems in an economy.
A short list of the key disadvantages of inflation
includes the following:
1. Losses to savers: If you save your money by
hoarding cash, inflation erodes the purchasing
power of the amount saved. For instance, R100
put underneath a mattress ten years ago can now
purchase only one third of the goods and services
that it could have done in 1987. (See Graph 1.)
Even if you save in the form of savings deposits
which pay interest, the interest may not be
enough to compensate you in full for inflation.
This also applies to pension planning, where a
person may, for example, save for a pension
during his entire working life, just to find at the end
of his career that his savings have been eroded by
inflation.
2. Losses to people with fixed incomes: People with
fixed incomes (such as the interest on a fixed
deposit, or a fixed salary) find that the purchasing
power of their income diminishes over time. The
wealthy, in contrast, can usually partly protect
themselves against inflation by investing in assets,
such as shares or property, which increase in
value during periods of inflation. Inflation therefore
leads to an increase in the disparity between the
wealth of the "haves" and the "have-nots", or the
rich and poor.
3. Losses to taxpayers: If your salary increases in
line with inflation, and no adjustments are made
to income tax, you will shift into a higher tax
bracket and end up paying a larger share of your
salary to the taxman. This means that
Government gains control over an increasing
proportion of society's resources without formally
getting the approval of Parliament to raise taxes.
Confusing price signals to producers and slower
expansion of businesses: A higher price for a
product would usually indicate that people want
more of it, that more profits can now be made
from it and that more resources should therefore
be employed to produce it. In times of inflation,
however, an increase in the price of a product can
occur either simply as part of the regular inflationrelated
adjustments to prices, or because the
demand for that product has risen permanently.
Entrepreneurs, not knowing which of the two

13.controlling inflation- anti-inflationary measures

1. monetary measures,
2. fiscal measures,
3. physical (non- monetary) measures.

 Monetary measures- can help reducing the pressure of demand.

Monetary policies work by controlling the cost and availability of
credit.
The mechanics for dear money policy are:
1. raising bank rates thus resulting in:
  borrowing becoming costly
 reducing prospects of additional spending
 making savings more attractive
 reducing consumer spending

2. directly controlling credit creation-

 open market operation
 varying reserve ratios

 Fiscal measures- fiscal policy comprises of revenues and

expenditure of government.
Fiscal measures consists of-
1. reduction of government spending
2. imposition of new taxes or increasing the old ones;
3. encouraging savings or introduction of compulsory savings schemes
4. public debt management so as to reduce the supply of money
5. gold sterlisation
6. over- valuing domestic currency in terms of foreign currencies.

 physical (non- monetary) measures includes;

1. increasing output or increasing imports and decreasing exports so as
to increase the available supply of goods in short supply
2. controlling money wages to keep down costs
3. price control and rationing;

inflation in india
Inflation in India is at an acceptable level and remains much lower than in many other developing countries.
But off late prices of essential commodities such as food grain, edible oil, vegetables etc have risen sharply
and in the process driving up the inflation rate. 

Inflation is defined as a sustained increase in the general level of prices for goods and services. It is
measured as an annual percentage increase. As inflation rises, the value of currency goes down. Thus the
purchasing power of the currency, i.e. the goods and services that can be bought in a unit of currency, too
goes down. 

Measuring inflation is a difficult task. To do so a number of goods that are representative of the economy are
put together into what is referred as a "market basket." The cost of this basket is then compared over time.
This results in a price index, which is the cost of the market basket today as a percentage of the cost of that
identical basket in the starting year. In India two types of index: Consumer Price Index (CPI) and Wholesale
Price Index (WPI) are used to monitor inflation. Off the two, Wholesale Price Index (WPI) is the most widely
used price index in India. It is used to measure the change in the average price level of goods traded in
wholesale market and is available on a weekly basis with the shortest possible time lag only two weeks. 
The current rise in inflation has its roots in supply-side factors. There was shortfall in domestic production
vis-a-vis domestic demand and hardening of international prices, prices of primary commodities, mainly food
items. Wheat, pulses, edible oils, fruits and vegetables, and condiments and spices have been the major
contributors to the higher inflation rate of primary articles. The inflation was also accompanied by buoyant
growth of money and credit. While the GDP growth zoomed to 9.0 per cent per annum, the broad money
(M3) grew by more than 20 per cent. Demand for nearly everything from housing to fast moving consumer
goods is outpacing supply in part because white-collar salaries are rising faster in India than anywhere else
in Asia. One of the daunting tasks before the government is to reconcile the twin needs of facilitating credit
for growth on the one hand and containing liquidity to tame inflation on the other.