Definition : Inflation is defined as a sustained increase in the general level of prices of goods and services.

Inflation occurs when the general price level is increasing (rising). Inflation refers to a state where the general price level increases but the actual (real) value of money decreases. Supply of money increases. The purchasing power of an individual is decreased.

Increase in Public Expenditure. Deficit Financing. Erratic Agricultural Growth. Agricultural Price Policy of Government. Inadequate Rise in Industrial Production.

on the basis of severity inflation is classified in to three types.

Low inflation: in low inflation prices rise slowly and predictably.

Galloping inflation: here prices increase in the range of double digit or triple digit like 50, 100 etc % a year.

Hyper inflation: here, the prices rise around thousands and millions % a year.

It is caused when demand of goods and services exceed the supply. Such situation occurs when the supply of money increases faster than the supply of goods and services. Thus demand of goods rises but there is no adequate supply making the prices to rise.

This theory can be summarized as "too much money chasing too few goods." If demand is more than supply at ruling prices, then, prices increases.

When the Demand Pull Inflation sets in there an increasing demand for factors of production the prices of these also rise, leading to rise in general prices. This is called as Cost Pushed Inflation.

Cost Push inflation

When companies' costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports. .

 Refers

to a situation where prices persistently rise because of growing factor costs; Sometimes also known as, Wage inflation; It occurs when factors of production specially wage earners try to increase their share of the total product by raising their prices; A cost push inflation is much more difficult to control than a demand pull inflation since it is not susceptible to direct control.

P2 P1 D S2 S1

Price level

Output

Q2 Q1

INFLATION

MONETARY POLICY

FISCAL POLICY

RESERVE BY RBI

OPEN MKT POLICY

BANK RATE

TAXATION POLICY

PUBLIC EXP POLICY

PUBLIC DEBT POLICY

Cash Reserve Ratio cash reserve ratio and loan giving capacity Open Market Operation it means that the government starts buying and selling of the government securities ,treasury bills, gold and foreign exchange. Bank Rate it is the rate at which bank give loans to the customers and also discounting of the bills take place.

Public expenditure policyPublic debt policyIt means the deficit is filled by borrowing from the central bank. borrowings are called public debt.

rich people have higher propensity to spend. people spend after they pay tax i.e. disposable income. thus this income which comes in the hand of the spender automatically gets reduced or increased as the tax rate rise or fall.

Taxation policy-

1.Monopoly of note issue 2.Acts as banker to the government 3.Bankers Bank 4.Lender of last resort 5.Bank of clearance 6.Custodian of nations gold and foreign exchange 7.Publishes economic statistics & other useful information. 8.Controller of credit.