Maria-Christina Basalo

BSBA-FM

Finals Assignment: Inflation

1. What is inflation?
● Inflation is the general increase in the cost of goods and services. And it’s the gradual rise
in prices and slow decline in purchasing power of your money over time. And it is also an
economic concept that refers to increases in the price level of goods over a set period of
time.
2. What are the causes of inflation?
● Demand - Pull Inflation, Cost - Push Inflation, and Built - in Inflation
● Printing and giving away more money to citizens.
● Legally devaluing (reducing the value of) the legal tender currency.
● Loaning new money into existence as reserve account credits through the banking system
by purchasing government bonds from banks on the secondary market (the most common
method.)
3. What is deflation?
● Deflation is a general decline in prices for goods and services, typically associated with a
contraction in the supply of money and credit in the economy. Deflation frequently
precedes a recession. A recession means lower incomes, job losses, and significant losses
to most financial portfolios. Deflation increases as a recession worsens. Businesses cut
their pricing in desperate attempts to entice customers to acquire their goods and services.
4. What are your thoughts and learnings to what happened in Sri Lanka's economy now?
● Experts say that the country's economic demise is the result of successive governments' misuse of
cash, which has led to a twin issue of a budget shortage and a mounting current account deficit.
However, the current economic crisis is the outcome of the Rajapaksa clan's high promises in the
2019 election campaign, which promised residents huge tax cuts. In comparison to comparable
countries, this country has a very small tax base and a low tax revenue to GDP ratio. Today, we
are traveling to Bangladesh hand in hand to make foreign currency and swap arrangements.
Following that, the government put a restriction on fertilizer imports into the country. Perhaps the
decision was made to encourage organic farming or to save money. The ban, however, did not sit
well with farmers, and food prices skyrocketed.
5. If you are the president of Sri Lanka, how are you going to deal with the inflation and what
advice can you give to the government?
● If I were President of Sri Lanka, I would attempt to lower inflation by raising taxes (such as
income tax and VAT) and cutting spending. This improves the government's fiscal situation and
helps to lower economic demand. Both of these approaches reduce inflation by slowing aggregate
demand growth. Contractionary monetary policy is also a more prevalent approach of reducing
inflation today. A contractionary policy aims to shrink an economy's money supply through
raising interest rates. This helps to restrict economic growth by increasing the cost of loans, which
affects consumer and company expenditure.