BY: UPASANA SYAL ROLL NO.

:12 CLASS : XI-A

The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum. In simple terms inflation is related to rapidly rising prices of goods, services, causing decline in the value of money which is in inverse proportion to inflation

Percentage increase in price level. When most prices grow, there is inflation, provided the other prices don't drop too heavily. If inflation is not compensated by nominal increases of income, people become poorer. High and variable inflation makes economic price forecasting more difficult and decision-making processes may be negatively affected. Extremely high inflation attracts too much daily attention from households and decisionmakers, distracting them from more important tasks.

Hyperinflation Extremely high inflation Moderate inflation Low inflation Creeping Inflation Chronic Inflation Walking Inflation Moderate Inflation Running Inflation Galloping Inflation

Hyperinflation is the most extreme inflation phenomenon, with yearly price increases of three-digits percentage points and an explosive acceleration.

Extremely high inflation could range anywhere between 50% and 100%. High inflation is a situation of price increase of, say, 30%-50% a year. Both kinds can be stable or dangerously accelerate to enter in an hyperinflation condition

Moderate inflation can be differently defined around the world, given the different inflation histories. As an indication only, one could consider an inflation as moderate when it ranges from 5% to 25-30%. For some countries, the higher part of this range is already "high inflation".

Low inflation can be characterized from 1-2% to 5%. Around zero there is no inflation (price stability). Below zero, a country faces deflation.

Creeping Inflation : When prices are gently rising, it is referred as Creeping Inflation. It is the mildest form of inflation and also known as a Mild Inflation or Low Inflation.

Chronic Inflation : If creeping inflation persist (continues to increase) for a longer period of time then it is often called as Chronic or Secular Inflation

Walking Inflation : When the rate of rising prices is more than the Creeping Inflation, it is known as Walking Inflation. When prices rise by more than 3% but less than 10% per annum (i.e between 3% and 10% per annum), it is called as Walking Inflation..

Moderate Inflation : Prof. Samuelson clubbed together concept of Creeping and Walking inflation into Moderate Inflation. When prices rise by less than 10% per annum (single digit inflation rate), it is known as Moderate Inflation.

Running Inflation : A rapid acceleration in the rate of rising prices is referred as Running Inflation. When prices rise by more than 10% per annum, running inflation occurs.

Galloping Inflation : According to Prof. Samuelson, if prices rise by double or triple digit inflation rates like 30% or 400% or 999% per annum, then the situation can be termed as Galloping Inflation.

 Demand side

Increase in aggregative effective demand is responsible for inflation. In this case, aggregate demand exceeds aggregate supply of goods and services. Demand rises much faster than the supply. We can enumerate the following reasons for increase in effective demand.

Increase in money supply: Supply of money in circulation increases on account of the following reasons deficit financing by the government, expansion in public expenditure, expansion in bank credit and repayment of past debt by the government to the people, increase in legal tender money and public borrowing.

1.

Increase in money supply: Supply of money in circulation increases on account of the following reasons deficit financing by the government, expansion in public expenditure, expansion in bank credit and repayment of past debt by the government to the people, increase in legal tender money and public borrowing. Increase in disposable income: Aggregate effective demand rises when disposable income of the people increases. Disposable income rises on account of the following reasons reduction in the rates of taxes, increase in national income while tax level remains constant and decline in the level of savings. Increase in private consumption expenditure and investment expenditure: An increase in private expenditure both on consumption and on investment leads to emergence of excess demand in an economy. When business is prosperous, business expectations are optimistic and prices are rising, more investment is made by private entrepreneurs causing an increase in factor prices. When the incomes of the factors rise, there is more expenditure on consumer goods. Increase in Exports: An increase in the foreign demand for a countrys exports reduces the stock of goods available for home consumption. This creates shortages in the country leading to rise in price level. Existence of Black Money: The existence of black money in a country due to corruption, tax evasion, black-marketing etc, increases the aggregate demand. People spend such unaccounted money extravagantly thereby creating unnecessary demand for goods and services causing inflation.

2.

3.

4.

5.

6.

Increase in Foreign Exchange Reserves: It may increase on account of the inflow of foreign money in to the country. Foreign Direct Investment may increase and nonresident deposits may also increase due to the policy of the government.
Increase in population growth creates increase in demand for everything in a country. High rates of indirect taxes would lead to rise in prices. Reduction in the rates of direct taxes would leave more cash in the hands of people inducing them to buy more goods and services leading to an increase in prices.

7. 8. 9.

10. Reduction in the level of savings creates more demand for goods and services.

Supply side Generally, the supply of goods and services do not keep pace with the ever-increasing demand for goods and services. Thus, supply does not match with the demand. Supply falls short of demand. Increase in supply of goods and services may be limited because of the following reasons.

1. Shortage in the supply of factors of production When there is shortage in the supply of factors of production like raw materials, labor, capital equipments etc. there will be a rise in their prices. Thus, when supply falls short of demand, a situation of excess demand emerges creating inflationary pressures in an economy. 2. Operation of law of diminishing returns When the law of diminishing returns operate, increase in production is possible only at a higher cost which de motivates the producers to invest in large amounts. Thus production will not increase proportionately to meet the increase in demand. Hence, supply falls short of demand.
3. Hoardings by Traders and speculators During the period of shortage and rise in prices, hoarding of essential commodities by traders and speculators with the object of earning extra profits in future creates artificial scarcity of commodities. This creates a situation of excess demand paving the way for further inflation. 4. Hoarding by Consumers Consumers may also hoard essential goods to avoid payment of higher prices in future. This leads to increase in current demand, which in turn stimulate prices. 5. Role of Trade unions Trade union activities leading to industrial unrest in the form of strikes and lockouts also reduce production. This will lead to creation of excess demand that eventually brings a rise in the price level.