Macroeconomics

Lecture 10: INFLATION

TOPICS TO BE DISCUSSED

1. Inflation

➢ Demand Pull Inflation

➢ Cost Push Inflation

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INFLATION

➢ Inflation is a persistent increase in the general price level of goods

and services in an economy over a period of time.

➢When the general price level rises, each unit of currency buys fewer
goods and services.

➢Consequently, inflation reflects a reduction in the purchasing power

per unit of money

➢It is a loss of real value, as a single dollar/rupee is able to purchase

fewer goods than it previously could
INFLATION

➢ Inflation is an increase in price levels, which decreases the real

value, or purchasing power of money

Inflation:

➢ Demand Pull Inflation

➢ Cost Push Inflation

DEMAND PULL INFLATION
Demand Pull Inflation- rise in the price level for goods and services in an
economy due excess aggregate demand than the economy's ability to
produce those goods and services (aggregate supply)

Demand pull inflation may be

due to :
➢Increase in money supply and
purchasing power
➢Increase in government
spending
➢Increase in exports
COST PUSH INFLATION
Cost Push Inflation- a rise in the price level for goods and services in an
economy due to increases in the costs of production

Cost push inflation may arise

because of :
➢ Increase in money wage rate
➢ Increase in prices of raw materials.
TYPES OF INFLATION

➢Creeping Inflation: or mild inflation is when prices rise 3% a year or

less. It is Good for the economy

➢Walking Inflation: inflation is between 3-10% a year. It is harmful to the

economy because it increase economic growth at faster rate. Demand
exceeds supply

➢Galloping Inflation: When inflation rises to ten percent or greater.

Money loses value so fast that it becomes difficult to keep up with costs
and prices
HYPER INFLATION & STAGFLATION

Hyper inflation
➢Rapid increase in prices
(More than 50%)
➢Increase in prices- out of control
Stagflation
➢A combination of inflation and unemployment
➢Slow economic growth and relatively high unemployment accompanied
by inflation.
HOW IS INFLATION MEASURED?

➢Wholesale Price Index (WPI )

• What is WPI- A weekly measure of wholesale price changes in the
economy
• India- the only major country that uses WPI
➢Consumer Price Index (CPI)
• measure of the average price of consumer goods and services purchased
by households
• CPI indicates the change in the purchasing power of the consumer
• CPI is calculated by collecting the prices of a sample of representative
items over a specific period of time.

CPI= Cost of CPI market basket at current period prices/Cost of CPI

market basket at base period prices×100.
•
EFFECTS/COST OF INFLATION

➢ Value of Money depreciates

➢ Gains and losses occur because of unpredictable changes in the value

of money.

➢ Purchasing power decreases- If the value of money varies unpredictably

over time, the quantity of goods and services that money will buy will
also fluctuate.

➢ Resources are also diverted from productive activities to forecasting

inflation.

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EFFECTS/COST OF UNANTICIPATED INFLATION

➢ Redistribution of income- people with fixed income are affected the most

➢ Lenders are affected more if the inflation is unanticipated

➢ Borrowers are affected more if the inflation is anticipated

➢ Too much or too little lending or borrowing

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CORRECTIVE MEASURES

➢Fiscal Policy
➢Monetary Policy

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FISCAL POLICY MEASURES

➢Reduce government spending

➢Raise taxes
➢Relax trade restrictions
➢Increase productivity
MONETARY POLICY MEASURES

➢Increase interest rates

➢Control money supply
CONCLUSION

➢Inflation leads to depreciation of money value

➢Creeping inflation is good for the economy

➢Inflation caused by demand side factors is called demand pull inflation

and pushed by supply side factors is called as cost push inflation
CONCLUSION

➢Inflation leads to depreciation of money value

➢Creeping inflation is good for the economy

➢Inflation caused by demand side factors is called demand pull inflation

and pushed by supply side factors is called as cost push inflation
Thank You ☺