November 30, 2023

DR MOEEN UD DIN

keynes QTM

Stagflation
money

demand-pull inflation quantity theory of money

cost-push inflation

dr.moeenuddin
 November 30, 2023

2
Inflation
”An increase in the general level of prices in an economy
that is sustained over a period of time.”
Milton Friedman
“By inflation is meant a steady and sustained rise in the prices.”

F. E. Perry
“Inflation means a steady and progressive fall in the value of money,
shown by price rises.”
Coulborn
“Too much money chasing too few goods”
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Inflation
Sustainable rise in prices may be of various magnitudes,
accordingly different name have been given to inflation
depending upon the rate of rise in prices.

Creeping Inflation / Persistent Inflation

Sustained rise in general price level about less than 3% per-annum

Trotting Inflation / Walking Inflation

Sustained rise in general price level from 3% to 6% per-annum
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Inflation
Running Inflation
Sustained rise in general price level about 10% per-annum

Jumping Inflation
Sustained rise in general price level above 11% per-annum

Hyper-Inflation / Galloping Inflation

Sustained rise in general price level above 100% per-annum
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Effects of Inflation

1. Positive Effects 2. Negative Effects

i. Increase in Investment i. Increase in Cost of Living

ii. Increase in Production ii. Unequal Distribution of Wealth
iii. Increase in Employment iii. Decrease in Savings
iv. Inventions & Innovations iv. Decrease in Investment
v. Economic Development v. Adverse Balance of Payments
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Deflation
”A reduction in the level of National Income and Output
usually accompanied by a fall in the general price level.”
W. J. Boumal
“Deflation refers to a sustained decrease in the general price level.”

Samuelson
“By deflation we mean a time, when most prices and costs are falling.”
G. Thomas
“Deflation is a reduction in the general price level due to a decrease in
the economic activity of a nation”
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Effects of Inflation

1. Positive Effects 2. Negative Effects

i. Reduces Cost of Living i. Decrease in Effective Demand

ii. Increase in real income of ii. Increase in Unemployment
Fixed Income Group iii. Decrease in Volume of Production
iii. Increase in Savings iv. Losses to the Business Community
iv. Favorable Balance of
v. Borrowing Difficulty for the
Payments
Government
 November 30, 2023

Stagflation
8
”A situation in which rapid inflation is accompanied by
stagnating or declining output and employment.”
Samuelson
“Stagflation involves inflationary rise in prices and wages at the same time. The people
are unable to find jobs and firms are unable to find customers for what their plants can produce
”

G. Thomas
“Stagflation is the combination of stagnation or recession and inflation in the economy.”
Michael swan

“Stagnation can be described as a contraction or stagnation of a nation`s output

accompanied by rise in the price level”

Stagflation = Inflation + Unemployment

 November 30, 2023

9 Reflation
”An inflation deliberately undertaken to relieve a depression.”
J. L. Hanson
“reflation is the easing of credit restrictions to encourage an expansion of production;
it is the milder sort of inflation that accompanies the upward swing of a trade cycle”
Bannock, Baxter, Rees
“Reflation is a macroeconomic policy designed to expand aggregate demand in order
to restore full employment levels in national income.”
Christopher, Lowes

“A reflation is often deliberately brought about by the authorities in order to secure full
employment and to increase the rate of economic growth.”
 November 30, 2023

10 Disinflation
”The reduction or elimination of inflation.”
H. S. Sloan
“Disinflation is a planned reduction in the general price level so administrated that the
economy is benefited by increased purchasing power and not harmed by drastic
deflation.”

G. Thomas
“Disinflation means the limiting or curbing of inflation by mildly deflationary
measures in order to maintain or increase the purchasing power of the monetary unit.”
Coulborn

“A lowering the prices, incomes and expenditures, when they would be beneficial,
would-be disinflation.”
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11 Hidden Inflation
”Disguised Inflation.”

H. S. Sloan
“it is the inflation in which the producers lower the quality of their products
in order to prevent an increase in the prices.”

Quality and quantity that decrease even though the price goes down.
It happens when the product stays at the same price but is offered in less
numbers or quality
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Theories of Inflation
[ Keynes` Quantity Theory of Money }

Money and Inflation :

Demand-Pull Inflation & Cost-Push Inflation
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Demand-Pull Inflation
“The inflation which arises when aggregate demand for all purposes –
Consumption, Investment, and Government Expenditures – exceeds the
supply of goods at current prices, there is a rise in prices.”

J. M. Keynes
“Inflation arises when there occurs an inflationary gap in the
economy which comes to exist when aggregate demand exceeds
aggregate supply at full employment level of output.”
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14 Demand-Pull Inflation
• Up till full employment level AS Curve moves AS*
upward Y
• AS Curve becomes vertical at full employment
level
• E1 is initial equilibrium level where price is P1, E2
P2
and income or employment is Y1
• Aggregate Demand rises from AD1 to AD*, New
DPI
equilibrium point EF indicates that prices
PF EF
increases from P1 to PF while income increases AD2
from Y1 to YF (full employment level). This E1
increase in price along with increase in output P1
does not represent inflation.
AD*
• If demand rises to AD3 while Aggregate Supply
is perfectly inelastic at YF, the new equilibrium
point E2, shows only a rise in price from PF to
P2. Hence, this rise in price represents Demand- AD1
Pull Inflation, as shown by the area shaded. 0 X
Y1 YF
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Cost-Push Inflation
“Cost-Push Inflation indicates the situation where even though
there is no increase in aggregate demand, prices may still rise.
This may happen if there is increase in costs independent of
any increase in Aggregate Demand.

J. M. Keynes suggested three causes of Cost-Push Inflation

i. Wage-Push Inflation
ii. Profit-Push Inflation
iii. Increase in Prices of Raw Material, Technology, Transport,
Communication, Advertisement, etc.
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16 Cost-Push Inflation
• Up till full employment level AS Curve moves AS*
upward Y
• AS Curve becomes vertical at full employment
level
• EF is initial equilibrium level where price is PF, B
and income or output or employment is YF E1
• Aggregate Supply falls due to increase in Wage P1
level, or profit earning, or prices of the raw CPI EF
material, etc. Hence, Aggregate Supply Curve
PF G
shifts leftward from AS* to AS1. Its slope remains
positive till full employment level YF, then it
becomes vertical, as shown by B.
AS1 AD*
• The new equilibrium point becomes E1, where
prices increases from PF to P1. This increase in
price represents Cost-Push Inflation, as shown
by the area shaded. AS*
0 X
Y1 YF
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Stagflation or Slumpflation
“A situation emerged because of Supply Shocks”

J. M. Keynes
Because of Cost-Push Inflation, Aggregate Supply falls,
hence AS Curve shifts leftward.
The reduced supply of goods will have the effect of
increasing the price level as well as reducing
the output or employment, or income level.
Which is termed as Stagflation.
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Stagflation
AS1

• Initially Aggregate Demand (AD*) and Y AS*

Aggregate Supply (AS*) Curves intersect each
other at point E1, where equilibrium price level
is PF while employment level is YF.
• Suppose Cost of Production rises, producing
power of the entrepreneur will decrease. As E2
result Aggregate Supply will fall, hence the P1 INFLATION
Aggregate Supply Curve will shift left-ward to
AS1.
PF G E1

UNEMPLOYMENT
• New Aggregate Supply Curve (AS1) intersects AD*
the Aggregate Demand Curve (AD*) at point E2,
as a result the price level rises from PF to P1 and
employment level decreases from YF to Y1.
• The shaded areas shows the occurrence of
Inflation as well as Unemployment, which is
termed as Stagflation. 0 X
Y1 YF
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dr.moeenuddin

dr.moeenuddin