By:

Gurmeet Singh
Lecturer in Economics
G.C.W Ludhiana
Mobile: 98149-73372
MEANING AND DEFINATION
Inflation means persistent rise in general price level.

In the words of Shapiro, inflation is simply a persistent

and appreciable rise in general price level. According to Coulbourn, “Inflation

is the stage of too much money chasing too few goods”.

Keynesian view of Inflation

1 semi inflation before full employment

2 open or full inflation after full employment

2. Suppressed inflation

3. War time inflation

4. peace time inflation

ON THE BASIS OF RATE OF INFLATION

1. creeping inflation

2. Walking inflation

3. Running or galloping inflation

4. Hyper inflation
Theories of inflation
1. Demand pull inflation
2. Cost push inflation
Demand pull or monetary theory of inflation
Demand pull or excess demand inflation is the traditional and most
common type of inflation. it is a situation in which aggregate
demand at the existing price level far exceeds aggregate supply.
Goods maybe in short supply either because resources are fully
utilized or production cannot be increased rapidly to meet the
increasing demand. In the words of Shapiro, according to demand
pull inflation, the general price level rises because the demand for
goods and services exceeds the supply available at existing prices.
1 Quantity theory of money or monetary theory of inflation:-
The monetarist emphasize the role of money as the principal cause of
demand pull inflation. Inflation is always a monetary phenomenon associated
with Fisher’s equation of exchange.
MV=PT
Here V and T remains constant and price level varies proportionately with
the supply of money.
2 Keynesian theory:-
He emphasize the increase in aggregate demand as the source of
demand pull inflation. Sources of demand includes consumption, investment and
govt. expenditure, when the value of aggregate demand exceeds the value of
aggregate supply at the full employment level, the inflationary gap arises. The
larger the gap, more rapid will be the inflation.
3 Modern quantity theory of money by Friedman:-
“Inflation is always and everywhere a
monetary phenomenon resulting from more rapid expansion in the quantity of
money than in total output”.
Inflationary Gap
 Keynes Explains demand Pull Inflation in the form
of Inflationary Gap. He refers to the “excess of
anticipated expenditure over the available output
at base prices”. In his article how to pay for the war
(1940)
The difference between the
quantity of money to be spend on consumption
goods and the actual availability of such goods is
called Inflationary Gap.
In the words of Kurihara, “An
excess of anticipated expenditure over available
output at base price is called Inflationary Gap”.
Inflationary Gap
Particulars Amount (Rs. Crore)
 National Income 100
 Taxes -20
 Disposable Income 80
 Gross National Output
 War Purchases 90
 Available Output -20
 Inflationary Gap 70
(80-70) = 10
Cost push inflation
It is caused by wage increases by unions and
profit increase by employers. it is also known
as New inflation. The basic cause of cost
push inflation is the rise in money wages
more rapidly then the productivity of labour. In
This situation, there is rise in prices on the
One hand and fall in output and employment
On the other.
Causes of cost push Inflation
1. Wage induced inflation
Wage increase lead to increase in cost of production which
lead to fall in supply & hence price rise.
2. Profit induced inflation
Imperfect competition leads to fall in production and to
increase profit producers increase prices.
3. Increase in the cost of inputs and raw materials
Causes of Inflation
Demand side factors
1. Increase in public expenditure
2. Cheap monetary policy
Bank rate, Cash reserve ratio will reduce rate of interest, which
lead to fall in saving, then consumption and demand increases.
3. Deficit financing policy
Printing of new currency lead to increase in money supply which
will increase consumption and demand.
4. Increase in disposable income
Fall in tax rates lead to increase in purchasing power which
increases demand.
5. More black money
6. Increase in various factors like population ,investment ,exports etc.
Supply side factors
1. Less production
2. Increase in taxes
3. Shortage of food grains
4. Lack of raw material
5. Industrial disputes
6. Productive set up
7. Bottlenecks in production
Measures to control inflation
MONETARY MEASURES
These measures are necessary to curb inflation. Central bank of the
country adopt monetary policy to check price rise.
1. Control over money supply
2. Credit control policy
3. Demonetization of old currency
FISCAL MEASURES
In order to check inflation Keynes has emphasized the role of fiscal measures.
Decrease in public expenditure, increase in public debts, delay in the payment of
old debts, increase in taxes and less deficit financing
OTHER MEASURES
Increase in production, proper commercial and investment policy, price control
and rationing, encouragement to savings and proper wage policy.
Inflation in India
in the current scenario inflation is a daunting task. in
India price rise is mainly because of supply side factors
rather than demand side. Speculative factors are also
playing there role in pushing the price upwards.
Hoarding and profiteering also increase the price
unduly. In indian scenario food price inflation is more
rapid than general inflation. Here Government and RBI
can control the price rise with the help of monetary and
fiscal policies.
CONCLUSION
THERE IS NO DOUBT THAT INFLATION IS A
DAUNTING TASK.BUT A MILD INCREASE IN PRICE LEVEL IS
NECCESSERY.THERE ARE SEVERAL CAUSES OF PRICE
INCREASE.DEMAND SIDE FACTORS EFFECT INCREASE IN DEMAND
AND SUPPLY SIDE FACTORS LEAD TO FALL IN
PRODUCTION,BECAUSE OF THESE TWO FACTORS PRICES TEND TO
RISE.PRICE RISE CAN REDUCE PURCHASING POWER OF A
CONSUMER,THAT’S WHY INFLATION SHOULD BE CONTROLLED
WITH THE HELP OF MONETARY AND FISCAL POLICIES