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Definitions of inflation
1) A rise in the prices of goods and services which occurs when economic
demand exceeds supply. The economy may grow so fast demand for
products and services are greater than the available supply. This situation
causes prices to rise. Over time, even with a relatively low inflation rate, the
purchasing power of a dollar is reduced. Things cost more; your dollar buys
less.
4) An increase in the cost of goods and services which, in turn, decreases the
buying power of money over time. Inflation is usually measured by the
Consumer Price Index and Product Price Index.
• What Is Inflation?
1
Eg: With Rs. 100 you can buy 5kgs of apple when the inflation is say,
zero. Now when the inflation rate is 5%, then you will need Rs. 105 to
buy the same quantity of apples. This is because there is more
money chasing the same produce.
While there are many types of inflation the prominent ones are:
Modest Inflation (2-3%)
Creeping Inflation (5-!0%)
Running Inflation (Over 10%)
2
rate help in contraction of credit in the country as it leads to
expensive central bank loan to commercial banks.
3
Eg: If you deposit Rs. 100000 @ 12% p.a., with the annual inflation
rate being 5% in the economy, then the real return on your deposit is
12%(nominal rate) minus 5%(inflation rate), i.e. 7% p.a.(real rate)
This is because after one year when your deposit matures you will
have to pay 5% more for any purchases owing to that being the rate
of interest in the economy for a year.