BANKING

Q. #: What is Commercial Bank?

Also mention its relative functions?

2 1. COMMERCIAL BANK:

A bank is a financial institute

which gives money and credit. It
accepts deposits from individuals,
firms and companies at a lower rate
of interest and gives at higher
rate of interest to those who need
them. A bank thus is a profit
earning institute.
According to Crowther, “A bank is a
firm which collects money from
those who have it spare. It lends
money to those who require it.”
In the word of Mr. Parking, “A bank
is a firm that takes deposits from
households and firms and makes
loans to other households and
firms.”

3 FUNCTIONS OF COMMERCIAL BANK:

A commercial bank performs a

variety of functions. These
functions are classified under two
main heads, (1) Primary functions
(2) Secondary functions

1) Primary Functions: The primary

functions of commercial bank are as
under:
(a) Accepting of deposits (b)
Advancing of money/Making loans.

(a) Accepting of deposits:

The first important function of
commercial bank is to accept
deposits from those who can save
but can’t make profitable use of
their saving themselves. In order
to attract the saving from
different persons and institutions,
the bank maintaining the three
types of accounts.

(i) Current Account: A current

account is one which can be
operated continuously without any
restrictions. The customer can draw
cheques against the account.
Therefore the bank usually doesn’t
pay the interest on the current
account deposits. The current
account holder receive cheque book
and regular statement containing
details of money paid in and paid
out.
(ii) Saving Account: The aim of
this account is to encourage and
mobilize savings of the people.
Saving account is generally opened
by persons of small income. The
banks pay interest on this type of
deposits. However, the banks
normally place restrictions on
their frequent withdrawal.
(iii) Fixed Deposit Account: Fixed
deposits are kept with the banks
for a specified period of time. The
rate of interest on fixed also
called “term deposit” are fairly
high. The longer period of deposit,
the high is the rate of interest.

(b) Advancing of money/Making loans:

The second major function of
commercial bank is to make loan to
businessman, traders, exporters,
householders etc. These loans are
made against documents of title of
goods, marketable securities and
personal securities of the
borrowers etc. The loaning of money
may be in any of the following
forms.

(i) Cash Credit: It is very common

form of borrowing by business
concerns. The bank advances loan to
the commercial and industrial units
against the security of goods. The
borrower if permitted to draw
within the cash credit limit
sanctioned by the bank. The
interest is charged only on the
amount of money withdrawn by the
borrower.
(ii) Loans: The commercial bank
grant short and long term loan to
individual, firms, and companies
mostly against securities. The
amount of loan is credited to the
borrowers’ account who withdraws it
as per his requirement.

2) Secondary Functions: Secondary

functions of commercial bank are
classified as under: (a) Agency
Functions (b) Utility
Functions

(a) Agency Functions:

The agency function bank act as
agent of there customer in various
ways as:

(i) Collection of Cheques: It acts

as agents to its customers in the
collection and payment of cheques
and bills.
(ii) Collection of dividends: The
bank provides a very useful service
in the collection of dividends or
interest earned on shares held by
its customers.
(iii) Purchase or Sale of
securities: The bank, if authorized
by customers, purchases or sells
securities on his behalf and adds
another benefit to its portfolio.

(b) Utility Functions: A bank

performs a number of other general
utility services to its clients
which are given below:
(i) Issue of Traveler’s Cheque: The
bank also issues traveler’s cheques
for the convenience of the
travelers and charges a nominal
commission.
(ii) Export Promotion Cell: In
order to boost (push) the exports
of the country, the banks have
established export promotion cells.
These cells provide information and
guidance to the exporters at no
extra cost.
(iii) Advice on Financial Matters:
Sometimes the banks give valuable
advices on various financial
matters to their customers.
(iv) Safe Custody of Valuable: The
banks keep valuable ornaments,
documents etc, for safe custody.

Q. #: What are the different types

of Commercial Bank?
 4 2. KINDS OF COMMERCIAL BANK:

Following are the main kinds of

commercial bank, which are given
below.
(i) State Bank: Every civilized
country now has its own central
bank or state bank. The primary
functions of state bank are to
arrange the flow of money and
credit in order to promote
efficiency and stability in the
country. In Pakistan State Bank of
Pakistan is the country’s central
bank.

(ii) Commercial Bank: Commercial

Banks are those banks which are
engaged in performing the routing
duties of banking business. They
collect surplus money from the
people. They make loans and
advances in the form of O/D
(overdraft) cash credit. Commercial
Banks are also providing agency
service and utility services. The
banks in short are considered the
life blood of economic society. In
Pakistan, the NBP, UBL, HBL, MCB,
etc. are performing the functions
of commercial banks.

(iii) Foreign Exchange Bank: The

Foreign Exchange Bank mainly deals
with international trade. These
banks take the responsibility of
settlement of foreign exchange and
arrange the foreign business in
Pakistan. All the nationalized
commercial banks have been allowed
to do the business of exchange
banks.

(iv) Saving Center Bank: Saving

Banks are those banks which collect
and keep small saving of people.
The saving banks invest the funds
in the safe way government
security. Post offices and saving
centers perform the business of
saving banks of Pakistan.
(v) Agriculture Development Bank:
Agriculture Banks are setup to
provide the financial assistance to
the agriculture. The agriculture
banks provide short term credit to
the farmers for the purchasing of
seeds. They also make medium term
advances for buying Tracters and
modern technology. ADBP
(Agriculture Development Bank of
Pakistan) was setup in 1981, to
meet financial requirement of
agriculture.

(vi) Industrial Development Bank:

These banks mainly provide medium
and long term credit to the
industries. Since the industrial
bank have long-term deposit. They
are in a position to permit long
term investment in industries. In
Pakistan Industrial Bank was setup
in 1961, other institutions engaged
in providing financial assistance
to industries are PICIC commercial
bank, NDFC bank etc…

Q. #: What are the different type

of customer of Commercial Bank?

5 3. TYPES OF CUSTOMERS:

Every commercial bank is anxious

to increase its customers. However,
every one can’t be accepted as its
customer. Only those persons who
are competent in law to enter into
a contract can be considered as
customers. The customers of a bank
can mainly divide into two
categories (1) Ordinary Customers
and (2) Special Customers. Ordinary
Customers are those who are
competent to inter into contract
under the laws of land. And
individual, a body corporate, a
firm can open an account with the
bank. The bank before accepting one
as a customer weighs the customer’s
financial position, his character,
honesty, social standing and good
will in the society. The special
customers are those who are dealt
with as special ones legally. The
relationship between bank and
special type of individual
customers are governed by the legal
rules enforced in the country.
The special types of individual
customers of the commercial banks
are (i) Minor (ii) Lunatic (iii)
Drunkard (iv) Married Women (v)
Purdah Observing Women and (vi)
Illiterate persons.

(i) Minor Customer: A person who

has not attained the age of 18
years is a minor. A minor cannot
enter into a contract. Therefore,
any contract with minor is void.
However, a bank can accept &
open a minor’s account if it is
directed by the Guardian Court. The
Court appoints a guardian of a
minor who obtains and signs the
prescribed opening form of the
account himself. He gives his won
specimen signatures for the
operating of the account. On
attaining the age of majority which
is 21 years, the minor is allowed
to open and operate the account
himself.
(ii) Lunatic Customer: A person who
is incapable of understanding, is
of unsound mind, cannot enter into
contract with the banker as
customer. If an account is already
existence of a same person but his
mental status is disturbed, the
bank on knowing the customer going
insane will immediately stop
payment from his account and
suspend all transactions till he
receives either satisfactory
evidence of his recovery or an
order is received from the court.

(iii) The Drunkard Customer: If a

person is in state of intoxication
& is not in senses, he cannot open
an account with a bank. The main
condition of valid contract with a
bank is between persons who are of
sound mind. However, if a person is
drunk, is of sound mind, he may
open & operate an account with a
bank.

(iv) The Married Women Customer:

Man & Woman are equal in the eyes
of law for the purpose of making a
contract. A married woman has every
right to enter into contract with a
bank and open an account. A married
woman is as good as a male member
of the society so far as law is
concerned. She can open any type of
account including Foreign Currency
Account in her name. If may here be
noted that a married woman cannot
make her husband responsible for
the debt incurred by her. It is a
sole responsibility of the married
woman to repay the loans and
advances made in her name by bank.

(v) The Purdah Observing Woman

Customer: The bank has to be very
cautions in opening an account of
Purdah observing lady. She cannot
be treated at par as with other
women. Before accepting a Purdah
observing woman as customer, the
banker must carry out a thorough
scrutiny (inspection) about the
identity of woman. A very close
referee of introducer, from the
point of view of the parties, the
customer and banker should confirm
the identity of the Purdah
observing lady.

(vi) The Illiterate Person Customer:

An illiterate person from the
banker’s point of view is the
person who cannot put his
signatures. He uses his thumb
impressions in place of signatures
for identification. The banker has,
therefore, to be very cautions in
honoring the cheques of illiterate
person. The banker usually takes
the following precautions in this
regard.
6 A Certified photograph of an
illiterate person is pasted on
the signature card for
identification.
7 At least two left hand thumb
impressions are placed in place
of specimen signatures for
identification.
Q. #: What precautions are usually
undertaken by bank, before cash
advances?

8 4.PRECAUTIONS OF CASH ADVANCES:

The following are the

precautions are usually undertaken
by bank, these are given below.
(i) The customer to be Honest,
Responsible and Trustworthy: Before
advancing loans against goods or
documents of title of goods, the
banker must be thoroughly satisfy
himself about the honesty,
trustworthy and experience of the
borrower in the trade or business.

(ii) Familiarity with different

markets: The banker must be
familiar with the up & down of the
price in the commodities, against
which he gives to advance loan
earlier. The up-to-date knowledge
of the different market enables the
banker to regulate the margin for
loans against produce goods.

(iii) Readily saleable commodities:

The banker should advance loan
against those commodities which are
of seasonal nature & are readily
saleable in the market.

(iv) Possession of Goods: In order

to secure the loan the banker
should take passions actual or
constructive of the goods. He
should also have a direct contract
with the owner or the agent who is
in possession of commodities.

(v) Storing of goods in the bank’s

Godown: The banker should not allow
the goods to remain in the godown
of the customer unless the key of
the godown and the services of the
watchman transferred to the bank.

(vi) Commodities having Stable

Market: The banker should prefer to
advance loans against those
commodities whose demand is less
inelastic. The goods with stable
markets are less liable to market
fluctuations.

(vii) Proper Evaluation: The banker

should accurately ascertain the
prices of commodities pledge for
loan. He can get information about
the prices from commodities broker,
journals and daily news papers.

(viii) Insurance of Goods Pledged:

The banker must also insure the
goods of the customer pledged with
the bank against loss of fire,
theft, etc. up to their full value.
Q. #: What is State Bank of
Pakistan? Also mention its relative
functions.

9 5. STATE BANK OF PAKISTAN:

The State Bank of Pakistan was

established on 1st July 1948, it is
the central bank of Pakistan. The
head office of SBP is at Karachi &
branches are at Lahore, Peshawar,
Quetta, Faisalabad, Rawalpindi,
Islamabad, Multan, Sialkoat,
Sukkur, and Hyderabad. The state
bank is the leader of all the other
banks. It doesn’t compete for
profit. It has right t issue notes
(currency). It is bank of Govt. and
commercial bank. It controls the
operation of other banks for
monetary and economic stability in
the country.
The state bank is managed by a
central board of directors. It
includes one Governor, one more
deputy Governor, and nine directors
nominated by the Federal
Government. There is also an
executive committee which is
empowered to transit business on
behalf of the central board of
directors. The Chief Executive of
the bank is the governor, who
controls and directs the affairs of
the bank on behalf of the central
board. The central directorate of
SBP has the department over 5,000
employees the departments are:
(i) Administrative Department (ii)
Accounts Department (iii)
Agriculture Credit Department (iv)
Audit Department (v) Banking
Control Department (vi) Banking
Inspection Department (vii)
Engineering Department (viii)
Exchange Department (ix) Legal
Division Department (x) Public
Relation Department (xi) Research
Department (xii) Statistical
Department(xii) Security Department
(xiv) Training Department.

10FUNCTIONS OF STATE BANK OF

PAKISTAN:

(a) The Bank of note issue: The

State Bank has the soul right for
the issuance of notes. The bank has
issued currency notes of rupees
10,20,50,100,500,1000,5000, the
notes are issued under fixed
minimum reserve system. The bank
keeps 30% in goals or foreign
exchange, & 70% in form of
securities; therefore notes issued
by the bank are fully convertible.
(b) Banker to Government: The State
Bank deal as a bank to the central
and provincial government. It
accepts deposits of the government.
It pays cheques on behalf of the
government. It pays cash for
payment of salaries & wages. It
provides loan to the Govt. for
ninety days. It transfers fund from
one account to another account &
from one place to another place.
The bank pays no interest on govt.
accounts.
(c) Agent to the Government: The
State Bank of Pakistan as an agent
receives loan for government
payments, interest on debts and
discount on treasury bills as
control the foreign exchange.
(d) Advisor to Government: The
State Bank also acts as advisor to
the govt. in all financial matters.
Since the State Bank is directly
involve in the money and foreign
exchange markets. It also provides
advice to commercial bank & other
financial institution & to commerce
& industries in general.
(e) Exchange Control: The State
Bank is authorized to control
foreign exchange. It has control
over the foreign receipts and
payments. The bank has exchange
control department for control on
the foreign exchange operations.
(f) Controller of Credit: The bank
controls the volume of credit it is
necessary for the economic
development of the country. The
credit is controlled by the bank
rate, policy open market operation.
It is the most important function
of the bank.
(g) Custodian of Foreign Exchange:
The State Bank of Pakistan acts as
a custodian of forex. It gives
gold, silver, foreign currency,
foreign bills at other securities.
Such reserves are necessary for
making payments to the other
countries. The bank controls the
movement of capital.
(h) Remittance Facilities: The
State Bank of Pakistan provides
facilities for transfer of money
from one to another place to the
members’ bank. The bank doesn’t
receive any commission for it.

Q. #: What is World Bank? Also

discuss its relative functions and
criticism.

116. WORLD BANK:

The name World Bank has too

different financial real existence.
It’s also called International Bank
for Reconstruction & Development
(IBRD) & International Development
Association (IDA). The World Bank
is international bank for
reconstruction and development was
established in 27th December 1945.
The bank started operation on 25th
June 1946. The IBRD has it is head
office at Washington DC, USA.
The management is vested with
the board of governors, consist one
governor from each member country
and 22 full time executive
directors. The board normally meets
ones a year. The governor of the
bank have delegated their many
powers to a board of Executive
Directors, 5 directors appointed by
five members like, USA, Japan,
Germany, France, UK, being a
largest stock holders and 17 are
elected by the governor
representing the other member
countries. The Board of Directors
performs its duties on a full time
basis. The president of the bank is
the Chairman of the Board.
The world bank provide
assistance for many projects like,
electricity power, transport,
agriculture, rural and urban
developments, water and sewerage
development, population, health,
education, housing development,
about 75% of the landing is for
roads plans, power station,
agriculture and industries. The
IRBD loans are for 20 years or less
with a gress period of 5 years. The
loans are made to government or
entities which can sure government
guaranties of repayment. The World
Bank on the whole has help
increasing the pare of economic
development of different countries
of the world.

12FUNCTION OF WORLD BANK:

Principal functions of World Bank

are as under:

i) To assist in the reconstruction

and development of member countries
by facilitating the investment of
capital for productive purpose.
ii) To promote and supplement
private foreign investment.
iii) To give performance more
useful and urgent projects.
iv) To assist in bringing about a
smooth transaction for war time to
peace time economy.
v) To ensuring that it is loan help
in the raising the standard of
living of the people in the
borrowing member countries.
vi) World Bank helps now the poorer
countries of the world it provides
recovery of advice & information
besides the making loans.

13CRITICISM ON WORLD BANK:

The working of World Bank is

criticized on the following grounds.

i) The World Bank charges a very

high rate of interest on its loan.
ii) There is discrimination in
advancing loan to member Europe &
Western countries of smaller both
in area and population, they have
received large amount of loans
where Asia and Africa both is rich
in natural resources are being
given up stamp motherly treatment.
iii) The loan given by World Bank
to the developing countries is too
small to play an effective role in
developing their economy.

Q. #: What is money? Also define

its functions.

147. MONEY:

Money is difficult concept to

define. The term money means
purchasing power, something which
buys things. In other words money
is purchasing power that can
exercise and immediate demand on
goods and services. Obviously such
purchasing power must be generally
accept as means of payments, medium
of exchange, historically in
remember able things have served,
as money in the modern world.
However, in the most countries
money the supply of consists of (i)
Currency Money (ii) Deposit Money.
(i) Currency Money: It is in the
form of coins & paper notes. It is
legal tender money. It is the money
which must by law is accepted in
payments of money obligation. In
very backward countries currency
money is the main item of money.
(ii) Deposit Money: Demand Deposit
or accounts in the bank fulfill
charging all the conditions
necessary to be designated as
money, cheques which present demand
deposit inspite are purchasing
power they buy goods & services.

15FUNCTIONS OF MONEY:

1) Money as a medium of exchange:

In all market transactions,
money is used to pay for goods and
services. The sale or purchase of
goods is done through money. Money,
in other words, acts as a medium of
exchange and helps in overcoming
the difficulty of double
coincidence of wants of the barter
economy.
 The use of money as a medium of
exchange has helped in promoting
efficiency in the economy. It has
reduced much of the time spent in
exchanging goods and services. It
has also promoted efficiency by
allowing people to specialize in
any area in which they have
comparative advantage and receive
money payments for labour. The use
of money as medium of exchange has
permitted more specialization by
lowering transaction cost and
encouraging division labour.

2) Money as standard of deferred

payments:
Another function of money is
that it is used as a mean of
settling debts maturing in the
future. In modern economy, most of
the business is done on credit.
Goods are brought and sold on the
promise to pay money on a certain
date in future. Debts are stated
and paid terms of units of account.
3) Influence on income and
consumption:
 The use of money has a direct
bearing on the levels of income and
consumption n the country. All
production takes place for the
market and the factor payments
(rent, wages, interest and profit)
are made in money. The higher the
production, the higher are the
remuneration to the factors and
vice versa.
4) Money is an instrument of making
loans:
People save money and deposit it
in banks. The banks advance these
savings to businessmen and
industrialists. Money is thus the
instrument by which saving are
transferred into saving.
5) Money is a tool of monetary
management:
Money is important tool of
monetary management. If the money
is effectively used, it helps in
increasing output and employment.
Money is also an important factor
in determining the distribution of
income and wealth among the members
of the society.
6) Instrument of economic policy:
Money is an important instrument
of economic policy of the
government. In order to achieve
growth, reduce unemployment and
maintain regular expansion of
economic activity; money is the
most powerful factor.

Q. #: What is inflation? Also

mention its relative causes,
remedies and kinds.
16INFLATION:
Inflation is a process in which
the price is rising at a rapid rate
and the money is losing its value.
In the words of Gardner Ackley,
“Inflation may be defined as a
persistent and appreciable rise in
general level of average of
prices.” It may here denote that
rising general level of price
doesn’t mean that all prices are
necessarily rising. Even during
inflation, the prices of some goods
may remain relatively constant and
a few others actually falling.
Inflation also does not mean that
prices of goods rise evenly or
proportionately. Inflation is an
upward movement in the general
(average) level of prices. In
Pakistan, the general price level
is persistently rising since
Partition of the Subcontinent.
Prices remained volatile during the
decade of 1990’s ranging form 5.7%
to 13% mainly because of declining
economic growth, expansionary
policies, output set backs, higher
taxes and a depreciation of
Pakistani rupee. The inflation rate
started declining form 1998 on ward
due to improved supply position of
goods, strict budgetary measures.
The inflation rate was 5.7% in
1998-99. It was brought down to
3.6% in 1992-2000 and further to
3.1% in 2002-03. The inflation rate
based on the CPI (Consumer Price
Index) has averaged 4.6% during
2003-04. The slight rise in prices
was the year 2004-05 mainly due to
rise in the price of wheat and an
increase in the international oil
price.
⇒ CAUSES OF INFLATION:
The causes of inflation are
generally grouped under two main
heads (a) Demand Pull Inflation (b)
Cost Push Inflation.
A. Demand Pull Inflation:
Demand pull inflation occurs
when aggregate demand for goods
exceeds aggregate supply of goods
at current prices, thus leading to
an increase in the price level. The
factors of which bring about
increase in aggregate demand for
goods or rise in the general level
of prices are grouped under two
separate heads; (i) Factors
operating on demand side (ii)
Factors operating on the supply
side.
(a) Factors operating on the demand
side: These are the factors which
bring continuous rise in the
general price level.
(1) Increase in money supply: An
increase in money supply leads to
an increase in money income. The
increase in money income raises the
aggregate demand for goods and
services in the country. The supply
of money increases when the govt.
resorts to deficit financing or the
commercial banks expand credit.
When too much money chases too few
goods, the result is an increase in
general price level.
(2) Increase in Government
expenditure: If there is increase
in govt. expenditure due to
adoption of development and welfare
activities of the country has to
flight a war, it causes as increase
in govt. expenditure which leads to
increase in aggregate demand for
goods and services and hence the
price level goes up.
(3) Increase in private expenditure:
A continuous increase in
consumption and investment
expenditure in the private sector
raises the demand for goods and
services and leads to inflationary
rise in prices.
(4) Increase in population: The
rapid rising population exerts
pressure on the demand for goods
and services. If the supply of
goods and services fail to match
with the demand, the general price
level moves upward.
(5) Black money: The money
generated through smuggling, tax
evasion etc. raises the demand for
luxury and other goods. Hence black
money is also one of the causes in
raising the aggregate demand for
goods and a rise in general price
level.
(b) Factors causing decrease in
supply of goods: If the increase in
aggregate demand for goods and
services is matched by an increase
in the supply of goods, it will not
cause inflationary situation. When
the aggregate supply of goods is at
a slower pace than the growth in
aggregate demand, it then causes
inflationary rise in prices. The
following factors are identified
for relatively slower growth in the
supply of goods.
(i) Lagging agricultural &
industrial production: The increase
in population, incomes, employment
and urbanization exert pressure on
the demand for goods and services.
However, the agricultural and
industrial production grows at a
slower pace, due to shortage of
essential inputs like fertilizers,
water, cement, iron etc. When
aggregate demand for goods and
services exceeds the aggregate
supply of it, it causes a rise in
the prices of agricultural and
industrial goods.
(ii) Inadequate infrastructure
facilities: If, in a country there
is shortage of power, transport and
communication facilities are slow
and inefficient, it results in the
slowing down of overall production
of goods. When the supply of goods
falls short of demand, the prices
go up in the country.
(iii) Long gestation period: If the
time lag between investment and the
production of goods is long, the
shortage of goods will arise. This
will also contribute to
inflationary pressure in the
economy.
B. Cost Push Inflation:
Cost push inflation occurs when
there is an increase in the cost of
production of goods and is not
associated with excess demand. The
main causes of cost push inflation
are:
(1) Increase in money wage rate:
The wage push inflation occurs when
strong labour unions manage to
press for wage increases in excess
of labour productivity. Unit cost
of production is thereby raised.
The rise in cost of production
exerts pressure on sellers to
increase prices of goods so as to
get profit margin.
(2) Profit push inflation: If the
producers of certain commodities
have monopoly or near monopoly
power in the market, they fix up
higher profit margins arbitrarily
without any increase in other
elements of cost. When a few
powerful firms increase the profit
margins, the smaller firms also
tend to mark up their profit
margins. The higher profit margins,
thus, inflate the price level.
(3) Material push inflation: If
there is increase in the prices of
some basic materials such as gas,
steel, chemicals, oil etc which are
used directly or indirectly in
almost all industries, it causes an
increase in the cost of production
and hence in the general price
level.
(4) Higher taxes: If the government
levies new taxes and raises the
rates of old taxes the producers
generally shift the burden of taxes
on to the consumers. The increases
in the selling prices of the
commodities push up the
inflationary trend in the economy.
(5) Import prices: If prices of
imported goods increase, it also
results in the contribution of
inflation.
⇒ KINDS OF INFLLATION:
Inflation is of different types. It
is generally classified on the
following basis.
• On the Basis of Rate of
Inflation:
(i) Creeping Inflation: It is a
situation in which the rise in
general price level is at a very
slow rate over a period of time.
Under creeping inflation, the price
level raises upto a rate of 2% per
annum. A mild inflation is
generally considered a necessary
condition of economic growth.
(ii) Walking Inflation: Walking
inflation is a marked increase in
the rate of inflation as compared
to creeping inflation. The price
rise is around 5% annually.
(iii) Running Inflation: Under
running inflation, the price
increases is about 8% to 10% per
annum.
(iv) Galloping or Hyper Inflation:
Galloping inflation is a full
inflation. Keynes calls it as the
final stage of inflation. It is a
stage of inflation which starts
after the level of full employment
is reached. Here price level rises
very rapidly within a short period.
• On the Basis of Degree of
Control:
(i) Open Inflation: It is a stage
when the rise in price level gets
out of control. Milton Friedman
describes it as “inflationary
process in which prices are
permitted to rise without being
suppressed by government price
control or similar measures.
(ii) Suppressed Inflation: Under
this type of inflation, the
government makes efforts to check
and control the rise in price level
through price and rationing. When
price level is suppressed by the
above short term measures, it
results in many evils such black
marketing, hoarding, corruption &
profiteering.
• Inflation on the Basis of
Causes:
(i) Demand Pull Inflation:
Inflation caused by increase in
aggregate demand, not matched by
aggregate supply of goods,
resulting in rise of general price
level is called demand pull
inflation. Demand pull inflation to
be simpler, occurs when the demand
for goods and services in the
country is more than their supply.
The effective demand for goods
increases due to many factors such
as increase in money supply,
increase in the demand for goods by
the government, increase in the
income of various factors of
production etc. In short, the
excessive increase in the money
supply causes inflationary
conditions. Demand pull inflation
is generally characterized by
shortage of goods and shortage of
workers.
(ii) Cost Push Inflation: Cost push
inflation occurs when the
increasing cost of production
pushes up the general price level.
Cost pull inflation occurs when the
economy is below full employment
with prices rising even though
there is no shortage of goods. Cost
push inflation is the result of
increase in wage costs
unaccompanied by corresponding
increase in productivity, rise in
import prices of goods,
depreciation in the external value
of the currency, higher mark up
etc, etc.
(iii) Profit Induced Inflation:
Profit inflation is in fact
categorized under cost push
inflation. When entrepreneur, due
to their monopoly position raise
the profit margin on goods. It may
cause profit push inflation.
(iv) Budgetary Inflation: When the
government of a country occurs the
deficits in the budgets through
bank borrowing and creating new
money (Deficit Financing), the
purchasing power of commodity
increases without a simultaneous
increase in the production of
goods. This leads to rise in the
general price level.
(v) Monetary Inflation: Milton
Friedman is of the firm view that
inflation is always and anywhere a
monetary phenomenon. According to
him, inflation is caused by a too
rapid increase in the money supply
and by nothing else.
(vi) Multi Casual Inflation:
Inflation has a number of causes.
It may be caused by increase in
money supply, excessive wage
demands, excess aggregate demand
for goods, shortage of goods etc.
The chief cause of inflation in one
year may not be in the next year.
Since inflation is multi causal,
therefore a variety of policy
measures are needed to deal with it.
 • On the Basis of Employment:
(i) Partial Inflation: According to
J.M. Keynes, takes place when the
general price level rises partly
due to an increase in the cost of
production of goods and partly due
to rise in supply of money before
the full employment stage is
reached.
(ii) Full Inflation: Full inflation
prevails when the economy has
reached the level of full
employment. Any increase in money
supply beyond full employment. It
is also called as real inflation.
• Anticipated versus Unanticipated
Inflation:
(i) Anticipated inflation is the
rate of inflation which majority of
the individual believes will occur.
When the rate of inflation (say 6%)
turns out to be same (6%) we are
then in a situation of fully
anticipated inflation.
(ii) Unanticipated inflation is
that which comes as a surprise to
majority of individuals. It can be
higher or lower than the rate of
anticipated inflation.