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TNPSC Free Notes Economy In English – Inflation

இந்தக் கட்டுரையில், TNPSC குரூப் 1, குரூப் 2, குரூப் 2A, குரூப் 4 மாநிலப் போட்டித் தேர்வுகளான TNUSRB, TRB, TET, TNEB போன்றவற்றுக்கான  முறைகள் இலவசக் குறிப்புகளைப் பெறுவீர்கள்.தேர்வுக்கு தயாராவோர் இங்குள்ள பாடக்குறிப்புகளை படித்து பயன்பெற வாழ்த்துகிறோம்.


Both inflation and deflation are evils of the economy. So, understanding of these is essential.
Meaning of Inflation

 Inflation is a consistent and appreciable rise in the general price level. In other words,
inflation is the rate at which the general level of prices for goods and services is rising
and consequently the purchasing power of currency is falling.
 “ Too much of money chasing too few goods” – Coulbourn
 “A state of abnormal decrease in the quantity of purchasing power” – Gregory
Causes of Inflation
Increase in Money Supply
 Inflation is caused by an increase in the supply of money which leads to an
increase in aggregate demand.
 The higher the growth rate of the nominal money supply, the higher is the rate of
Increase in Disposable Income
 When the disposable income of the people increases, it raises their demand for
goods and services.
 Disposable income may increase with the rise in national income or reduction in
taxes or reduction in the saving of the people.

Increase in Public Expenditure
Government activities have been expanding due to developmental activities and social welfare
programmes. This is also a cause for price rise.
Increase in Consumer Spending
The demand for goods and services increases when they are given credit to buy goods on hire-
purchase and instalment basis.
Cheap Money Policy
Cheap money policy or the policy of credit expansion also leads to an increase in the money
supply which raises the demand for goods and services in the economy.
Deficit Financing

 In order to meet its mounting expenses, the Government resorts to deficit financing by
borrowing from the public and even by printing more notes.
 This raises aggregate demand in relation to aggregate supply, thereby leading to an
inflationary rise in prices.
Black Assets, Activities and Money
 The existence of black money and black assets due to corruption, tax evasion etc.,
increase the aggregate demand. People spend such money lavishly.
 Black marketing and hoarding reduce the supply of goods. These trends tend to raise
the price level further.
Repayment of Public Debt
 Whenever the Government repays its past internal debt to the public, it leads to an
increase in the money supply with the public.
 This tends to raise the aggregate demand for goods and services.
Increase in Exports
When exports are encouraged, the domestic supply of goods decline. So there is a rise in the
Effects of Inflation
The effects of inflation can be classified into two heads:

1. Effects on Production and
2. Effects on Distribution.
Effects on Production
 When inflation is very moderate, it acts as an incentive to traders and producers. This is
particularly prior to full employment when resources are not fully utilized.
 The profit due to rising prices encourages and induces business class to increase their
investments in production, leading to a generation of employment and income.
 However, hyper-inflation results in a serious depreciation of the value of money and it
discourages savings on the part of the public.
 When the value of money undergoes considerable depreciation, this may even drain out
the foreign capital already invested in the country.

 With reduced capital accumulation, the investment will suffer a serious setback which
may have an adverse effect on the volume of production in the country. This may
discourage entrepreneurs and businessmen from taking business risk.
 Inflation also leads to hoarding of essential goods both by the traders as well as the
consumers and thus leading to still higher inflation rate.
 Inflation encourages investment in speculative activities rather than productive
Effects on Distribution
Debtors and Creditors
 During inflation, debtors are the gainers while the creditors are losers.
 The reason is that the debtors had borrowed when the purchasing power of money was
high and now repay the loans when the purchasing power of money is low due to rising
Fixed-income Groups
 The fixed income groups are the worst hit during inflation because their incomes being
fixed do not bear any relationship with the rising cost of living.
 Examples are wage, salary, pension, interest, rent etc.
 Inflation is a boon to the entrepreneurs whether they are manufacturers, traders,
merchants, businessmen because it serves as a tonic for business enterprise.
 They experience windfall gains as the prices of their inventories (stocks) suddenly
go up.
 The investors, who generally invest in fixed interest yielding bonds and securities have
much to lose during inflation.
On the contrary, those who invest in shares stand to gain by rich dividends and appreciation in
the value of shares.
Types of Inflation
On the Basis of Speed
1. Creeping Inflation

 Creeping inflation is slow-moving and very mild. The rise in prices will not be
perceptible but spread over a long period.
 This type of inflation is in no way dangerous to the economy. This is also known as
mild inflation or moderate inflation.
2. Walking Inflation
When prices rise moderately and the annual inflation rate is a single digit ( 3% – 9%), it is
called walking or trolling inflation.
3. Running Inflation
When prices rise rapidly like the running of a horse at a rate of speed of 10% – 20% per
annum, it is called running inflation.
4. Galloping inflation
 Galloping inflation or hyper inflation points out to unmanageably high inflation rates
that run into two or three digits.
 By high inflation, the percentage of the same is almost 20% to 100% from an overall

Demand-Pull Vs Cost-Push Inflation
1. Demand-Pull Inflation
 Demand and supply play a crucial role in deciding the inflation levels in society at all
points of time.
 For instance, if the demand is high for a product and supply is low, the price of the
products increases.
2. Cost-Push Inflation
When the cost of raw materials and other inputs rises inflation results. Increase in
wages paid to labour also leads to inflation.
3. Wage-Price Spiral
Wage-price spiral is used to explain the cause and effect relationship between rising
wages and rising prices or inflation.
On the Basis of Inducement
1. Currency inflation
The excess supply of money in circulation causes a rise in the price level.
2. Credit inflation

When banks are liberal in lending credit, the money supply increases and thereby
rising prices.
3. Deficit induced inflation
The deficit budget is generally financed through the printing of currency by the
Central Bank. As a result, prices rise.
4. Profit induced inflation
When the firms aim at a higher profit, they fix the price with a higher margin. So
prices go up.
5. Scarcity induced inflation
Scarcity of goods happens either due to fall in production (e.g. farm goods) or
due to hoarding and black marketing. This also pushes up the price.
6. Tax induced inflation
Increase in indirect taxes like excise duty, customs duty and sales tax may lead to a rise
in price (e.g. petrol and diesel). This is also called taxflation.

Meaning of Deflation, Disinflation and Stagflation
 The essential feature of deflation is falling prices, reduced money supply and
 Though falling prices are desirable at the time of inflation, such a fall should not
lead to the fall in the level of production and employment.
 But if prices fall from the level of full employment both income and employment
will be adversely affected.
 Disinflation is the slowing down of the rate of inflation by controlling the amount
of credit (bank loan, hire purchase) available to consumers without causing more

 Disinflation may be defined as the process of reversing inflation without creating
unemployment or reducing output in the economy.
Stagflation is a combination of stagnant economic growth, high unemployment and high
Measures to Control Inflation
Keynes and Milton Friedman together suggested three measures to prevent and control
1. Monetary measures,
2. Fiscal measures (J.M. Keynes),
3. Other measures.
Monetary Measures
 These measures are adopted by the Central Bank of the country.
 They are (i) Increase in bank rate (ii) Sale of Government Securities in the Open
Market (iii) Higher Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)
(iv) Consumer Credit Control and (v) Higher margin requirements (vi) Higher Repo
Rate and Reverse Repo Rate.

Fiscal Measures
 Fiscal policy is now recognized as an important instrument to tackle an
inflationary situation.
 The major anti-inflationary fiscal measures are the following: Reduction of
Government Expenditure, Public Borrowing and Enhancing taxation.
Other Measures
 These measures can be divided broadly into short-term and long-term measures.
 Short-term measures can be in regard to public distribution of scarce essential
commodities through fair price shops (Rationing).
 In India whenever a shortage of basic goods has been felt, the government has
resorted to the import so that inflation may not get triggered.

 Long-term measures will require accelerating economic growth especially of the
wage goods which have a direct bearing on the general price and the cost of
 Some restrictions on present consumption may help in improving saving and investment
which may be necessary for accelerating the rate of economic growth in the long run.


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