Price stability

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Introduction
 Increase in the general prices in an economy
that is sustained over a period of time
 State in which prices are rising & value of
money falling
 Consistence & appreciable rise in general
price level over a period of time
 Too much money chasing too few goods

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 Types of Inflation
 Creeping Inflation:
 Increase in price up to 3%.
 Running Inflation:
 The rate of inflation is 10 to 20 percent
 Hyper or Galloping Inflation:
the rate of inflation is 100% and more

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 Measuring of Inflation
 Inflation is rate of change in price level
 Formula ( (P1 – Po) / Po) X 100
P1 = current year price
Po = previous year price

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Impact of inflation
 Debtors
 Creditors
 Business firms
 Middle class people
 Workers
 Pension earners
 Investors
 Farmers
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Effect of inflation on output &
growth
 Short run :unanticipated inflation, prices rise
at a faster rate than wages leads to more
production
 Long run: if wages lag behind inflation
continuously, output is expected to grow at a
faster rate. The profits accrued are channeled
to capital expenditure thereby growth rate of
economy will increase

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 Source of Inflation
 Aggregate Demand
 Aggregate Supply

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 Aggregate Demand (AD)
 Aggregate demand (AD) refers to
collective behavior of all buyers in a
market.
 Real factors: government expenditure, tax
receipts
 The monetary factors: decrease in
demand for money & increase in supply of
money
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Demand Pull Inflation
Y
AS
Price Level

P1

P0
AD1

AD0

O Y0 Y2 Y1 X

Real Output
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 Aggregate Supply (AS)
 Aggregate supply is the real value of
output producers are willing to and able
to bring to market at alternative price
levels.
 AS curve has upward slope due to:
 Profit effect
 Cost effects

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 Cost Push Inflation
 Cost push theory of inflation explains the
causes of inflation origination from the
supply side.
 Cost push inflation depends on:
 Wage push inflation
 Profit push inflation
 Supply shock inflation

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Cost Push Inflation
Y
AS1
AS0
Price Level

P1

P0

AD

O Q1 Q0 X

Quantity
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 Phillips Curve
 The two variables that receive the most
attention in macroeconomics are
unemployment and inflation.
 Philips curve indicates the relation between
inflation and unemployment rate.
 The Philips curve indicates a trade- off
between inflation and unemployment.

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Philips Curve – A Trade-Off
∩P/P Y
Inflation

5
3

O 2 6 X

Unemployment
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Long Run Philips Curve – No
Trade-Off
∩P/P Y Long Run Phillips Curve

I3
Inflation

I2

I1
P31
PC2
PC1
O U2 U1 U3 X

Unemployment
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 Measures to Control Inflation
 Monetary Measures
 CRR
 SLR
 Bank rate
 Open market operations
 Selective credit control
 Margin requirement
 Moral suasion
 Direct action
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Fiscal measures
 Taxation
 Reduction in Government expenditure
 Public debt
 Administered pricing
 Rationing
 Rational wage policy

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Thank You

SESSION - 36 18