INFLATION PROBLEM, CAUSES AND SOLUTIONS

SUBMIITED BY: OBAID ULLAH KHAN

SUBMITTED TO: MS. SUNDUS

CLASS: MBA 2(B)

ROLL NO: 59

INFLATION:
In ordinary terms inflation would mean a process of rising prices. Technically speaking inflation means a persistent rise in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Inflation also reflects an erosion in the purchasing power of money. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index over time. Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time. Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. Today, most mainstream economists favor a low, steady rate of inflation. Low inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.

KINDS:
I. II. III. IV. V. Mild Inflation Cost push and demand inflation Suppressed inflation Hidden inflation Stagflation

1. Mild Inflation
According to most of the economists it reflects a favorable growth in the economy. When investment goes up, the level of national income increases; this indicates that the cost of production has also gone up. This is the growth process of an economy. The cost of production goes up because of the inelastic supply of certain raw materials due to which the wage rate is increased because laborers will now have to be paid more to be attracted from their present jobs

and hence the velocity of money circulation of money rises. All this creates a mild inflation which reflects a natural rate of growth in the economy. 2. Cost Push and Demand Inflation: Cost push inflation is a situation where a rise in the general price level is initiated and sustained by rising costs due to which prices go up. Demand pull inflation may be defined as a situation where the aggregate demand persistently exceeds the available supply of output at current prices which once again causes the general prices level to go up. With an increase in the population, the demand the demand for goods and services go up and so would the price level. Eventually laborers lose their purchasing power and demand higher wages, similarly rewards for other factors have to be increased and henceforth the cost of production goes up. This is cost push which causes a further increase in prices, which is known as the demand pull inflation. Cost push and demand pull support each other and this phenomenon leads to a wage price serial and if this is uncontrolled, it would be catastrophic for the economy. 3. Suppressed Inflation: This is only a temporary measure to preventing inflation but eventually leads to inflation. The govt. introduces a price control on commodities, and fixes the quantity of supply of basic essentials. This price control is usually very much below the equilibrium price. This is suppressed through price control and is called suppressed inflation. With the passage of time inflatory measures exert their full strength leading to sharp increase in the price level to meet the equilibrium price and hence cause inflation which was suppressed in the past. 4. Hidden Inflation: This is rather a dictatorial measure of price control where, out of fear, producers have to sell their goods to required prices. However they gain the upper hand by lowering down the quality of the products which cant be visualized. Now they will have a lower cost of production and start reaping substantial profits. This means that the producers are chargig=ng now higher prices and this is called hidden inflation. 5. Stagflation: This is a combination of two words i.e. stagnation of the economy and inflation in the economy. Since they take place simultaneously so it is called stagflation. It is a situation where both the unemployment and the rate of inflation are high as compared to accepted standards. In this case, even with an increase in the investment in a country the real national income practically remains the same because at the same time the rate of growth of population is increasing and so is the money supply. Hence, the demand for goods and services keeps on increasing which eventually leads to inflation.

CAUSES:
Policy of deficit financing Increase in the quantity of money Increase in non