Inflation (Economics) by Dr.N.Moogana Goud

8/9/2019 Inflation (Economics) by Dr.N.Moogana Goud

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INFLATION

Presentation

By

Dr.N.Moogana Goud

Prof and Director(MBA Programme)


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INFLATION

What is inflation?

Inflation measures the annual

rate of ch

ange of th

e generalprice level in the economy.

Inflation is a sustained increase in

the average price level.

Focus here on the overall level of

prices throughout the economyrather than prices in one particular

market or industry.


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INFLATION


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Inflation and the Price Level

When prices rise, the value of money falls.

There is an inverse relationship between the

price level and the internal purchasing power

of money.

People can protect themselves against the effects

of inflation by investing in financial assets that

give a rate of return at least equal to the rate of

inflation.

INFLATION


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INFLATION


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INFLATION

Hyperinflation is

extremely rare. Recent

examples include Argentina,

Brazil, Georgia and Turkey

(where inflation reached 70%

in 1999). The classic

example of hyperinflation

was of course the rampant

inflation in Weimar Germany

between 1921 and 1923.


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INFLATION


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INFLATIONMost economists believe that disinflation or falling

inflation is beneficial for the economy. A stable price

level can lead to better decisions and a more efficient

use of scarce resources.A decline in prices after an improvement in

productivity is allows companies to cut costs and

prices, thereby raising living standards.

The type of deflation that analysts fear is the kind thatis broadly-based throughout the economy, long-

lasting, and symptomatic of a weak economy stuck in

recession.


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INFLATION

DEMAND PULL INFLATION

occurs when total demand for goods and services

exceeds total supply.happens when there has been excessive growth

in aggregate demand and there is an inflationary

gap.

it is often monetary in origin.

The phrase that is often used is that there is "too

much money chasing too few goods"


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INFLATION

Demand pull inflation can be illustrated graphically using

aggregate demand and aggregate supply analysis.


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INFLATION

Aggregate supply (AS) shows the total supply of goods

and services

When aggregate demand (AD) increases from AD to AD1

the economy is still operating at relatively low levels of

capacity. Output can expand relatively easily so firms will

only implement small increases in prices from P to P1.

When aggregate demand increases from AD1 to AD2 the

economy is moving towards the full employment offactors of production.


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INFLATION

Main causes of increased aggregate demand:

A depreciation of the exchange rate increases the price

of imports and reduces the foreign price exports

A reduction in direct or indirect taxation

Rapid growth of the money supply

Faster economic growth in other countries


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INFLATION

COST PUSHINFLATION

It when firms increase prices to maintain or protect

profit margins after experiencing a rise in their costs of

production.

inflation can also come from external sources, for

example a sudden rise in the cost of crude oil or other

imported commodities, foodstuffs and beverages.

Fluctuations in the exchange rate .


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INFLATION

This can be shown by an inward shift of the short run

aggregate supply curve which leads to a contraction in

aggregate demand and a fall in real output, but an increase

in the general price level.


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INFLATION

The main causes of cost push inflation are:

Rising imported raw materials costs perhaps caused by

inflation in other countries or by a fall in the value of the

pound in the foreign exchange markets

Firms may decide to pass on this to their customers

Higher indirect taxes imposed by the government - for

example a rise in the specific duty on alcohol and

cigarettes, an increase in fuel duties or a rise in thestandard rate of Value Added Tax.


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INFLATION


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INFLATION

INFLATIONARY GAPS

When aggregate demand exceeds an economy's productive

potential there is an inflationary gap. We tend to see rising

inflation and a worsening trade situation at these times.

This situation occurs when the economy has been growing

for some time leading to a build up of inflationary

pressure as demand rises.


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INFLATION


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INFLATION

CONTROLLING AN INFLATIONARY GAP

The government may use monetary and or fiscalpolicy to help reduce the size of the inflationary gap.

An improvement in the supply-side performance ofthe economy would also achieve this. Monetary Policy: Higher interest rates to curbconsumer demand Fiscal Policy: A rise in the burden of taxation to

reduce real disposable incomes


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INFLATION

Supply-side Policy:Measures to increase productivity

and efficiency. This leads to a rise in aggregate supply and

reduces the amount of excess demand in the long run.


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MEASURES TO CONTROL INFLATION

1. MONETARY MEASURES

control the growth of demand through an

increase in interest rates and a contraction in thereal money supply.

These measures include the Bank rate policy,

Open market Operation, Variable cash

Reserve Ratios and selective credit control


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BANK RATE POLICY:

The effects of higher interest rates

reduce aggregate demand in three main ways;

Discouraging borrowing by both households and

companies.

Increasing the rate of saving (the opportunity cost of

spending has increased)

A rise in real interest rates should reduce the demand for

lending and therefore reduce the growth of broad money.


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CASH RESERVE RATIO

The Centrel Bank can immediately reduce the amount of

credit which commercial banks can create.

THE SELECTIVE CREDITCONTROL MECHANISM

It is particularly the consumer credit regulation. Therefore

regulating the consumer credit proves to be an effective

measure to mitigate the inflationary pressure.


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2. FISCAL MEASURES

Higher direct taxes (causing a fall in disposable income)

Lower Government spending

A reduction in the amount the government sector

borrows each year (PSNCR)

These fiscal policies increase the rate of leakages from the

circular flow and reduce injections into the circular flow

of income and will reduce demand pull inflation at the costof slower growth and unemployment.


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3. DIRECTWAGE CONTROLS

If the policy of wages is effectively implemented, the real

income of wage and salary earners declines and thus in a

country where wages constitute an important part of the

national income, the consumption spending also falls

significantly.


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4. PRICE CONTROL

It implies that the fixation of maximum prices at which

commodities is to be sold. Since the aim of the control

authorities is to make commodities available to the people

at prices which they can pay, the maximum prices for each

commodity is set below the market disequilibrium price.



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5. AN APPRECIATION OF THE EXCHANGE RATE

A rise in the value of the exchange rate might be achieved by

an increase in interest rates or through the purchase of

sterling via Central Bank intervention in the foreign

exchange markets.


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LONG-TERM POLICIESTOCONTROL INFLATION

Labour market reforms

Supply-side reforms: If a greater output can beproduced at a lower cost per unit, then the economy can

achieve sustained economic growth without inflation.


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THANK YOU

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Inflation (Economics) by Dr.N.Moogana Goud