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Ms.Swati S
Roll No 17
“Something which decides
economy of the country”
Table of Content

 Defination
 Theories of inflation and control measures
 Methods of measuring inflation
 Kinds/ types of inflation
 Modern theories of inflation in less developed countries
 The structuralist views effects of inflation
Layman :- “RISE in PRICE’

 Definition:-

According to Pigou “ Inflation arises

when money income is expanding
more than proportionate to income
earning activity”.

Arthur Cecil Pigou

Theories of inflation and control

Inflation: The •Mixed Demand Inflation
The problem of identifying
•The Demand-Pull theory of If costs the basic nature-and
Inflation: The theory of rise too fast, fundamental source of
inflation continues. Does
demand-pull inflation companies will inflation arise from the
relates to what may need to put prices demand side of the
goods, factor and asset
be called the up to maintain markets or from the
traditional theory of their margins. ... supply side or from some
combination of the two—
inflation. ... the so-called mixed
Demand Pull Inflation
Defination :-Demand-pull inflation happens where there is 'too
much money chasing too few goods'. Excessive growth in demand
literally pulls prices up.Demand-pull inflation happens when the
level of aggregate demand grows faster than the underlying level of
 Increase in Money Supply
 Increase in size of Population
 Credit Creation
 Black Money
 Export Trade
 Public Debt
Cost Pull Inflation
Defination :-If costs rise too fast, companies will need to put prices up
to maintain their margins. This will cause inflation.Cost-push inflation
happens when costs increase independently of aggregate demand

• Higher Wages
• Material Cost
• Credit Creation
• Profit Margin
• Natural Calamities

 Moderate Inflation / Creeping Inflation :- Takes place when the

prices of goods and services rise at a single digit rate
annually. Moderate inflation is also termed as creeping inflation.
When an economy passes through moderate inflation, the prices of
goods and services increase but at moderate rate.

 Walking Inflation :- Walking or Trotting Inflation: When prices rise

moderately and the annual inflation rate is a single digit (3% - 10%),
it is called walking or trottinginflation. Inflation at this rate is a
warning signal for the government to control it before it turns into

 Galloping Inflation :- is a type of inflation that occurs when the

prices of goods and services increase at two-digit or three-digit rate
per annum. Galloping inflation is also known as jumping inflation.

 Hyper Inflation:- is usually caused by an extremely rapid growth in

the money supply of an economy. When the monetary and fiscal
policy allow the issuance of “new” money to accommodate for
government spending, the money supply grows faster than the real
output of the economy, thus causing inflation.

 Suppressed Inflation:- This is situation unable to come out from the

inflation (underdeveloped countires) Tribal area people
Methods of measuring inflation

Monetary measures

Fiscal measures

Other measures

Modern theories of inflation
in less developed countries

Monetary Measures

Fiscal Measures

Other Measures
Detailed structure
 Monetary measures- Classical economists are of the view that inflation can be
checked by controlling the supply of money. Some of the important monetary
measures to check the inflation are as under: Control over money-It is suggested
that to check inflation government should put strict restrictions on the issue of
money by the central bank.Credit control-Central bank should pursue credit
control policy .In order to control the credit it should increase the bank rate ,raise
minimum cash reserve ratio etc. It can also issue notice to other banks in order to
control credit
 .Fiscal measures- Measures taken by the government to control inflation.
A: Decrease in public expenditure- One of the main reasons of inflation is excess
public expenditure like building of roads ,bridges etc. Government should
drastically scale down its non essential expenditure.B-Delay in payment of old
debts: Payment of old debts that fall due should be postponed for sometime so
that people may not acquire extra purchasing power.C-Increase in taxes :
Government should levy some new direct taxes and raise rates of old taxes.D-Over
valuation of money: To control the over valuation of money it is essential to
encourage imports and discourage exports
 Other measures
 Increase in the production- One of the major causes of the
inflation is the excess of demand over supply ,so those
goods should be produced more whose prices are likely to
rise rapidly .In order to increase production public sector
should be expanded and private sector should be given
more incentives.
 Proper commercial policy- Those goods which are in
scarcity should be imported as much as possible from other
countries and their export should be discouraged.
 3Encouragement to savings –During inflation government
should come out with attractive saving schemes. It may
issue 5 or 10 year bonds in order to attract savings
The structuralist views effects of
Output Price Rise

Input Price Rise

Time Lag

Higher Income Group

Enhance Production Capacity

of the economy

Government Policy
 Output Price Rise :- A measure of the change in the prices of goods and services sold as
output by domestic producers. Covers both output sold on the domestic market
and output sold as exports.
 Input Price Rise :- A measure of the change in the prices of goods and services sold as
output by domestic producers. Covers both output sold on the domestic market & Imports

 Time Lag :- Rounding broadly, there is a one-year time lag between actions taken by the
Federal Reserve and effects on spending, production and employment. Then there is another
one-year time lag until inflation rises or falls

 Higher Income Group :- Inflation affects the poor very badly, and worse, it affects them for life
and for generations. Particularly for the poor, inflation forces them to spend almost their entire
income for the very basic necessities of survival like food, clothing and shelter,in that
order.Higher income group is not affected by inflation
 Enhance Production Capacity of the economy :- Economic growth is an increase in
the capacity of an economy to producegoods and services, compared from one period of
time to another. It can be measured in nominal or real terms, the latter of which is adjusted
for inflation.
 Government Policy :- Again the same sudden changes & declaration by government will
always impact the inflation