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Inflation and Monetary Policy

This document defines inflation and discusses different types of inflation including demand-pull and cost-push inflation. It outlines various causes of each type of inflation such as increases in money supply, income, spending, wages, and population growth for demand-pull inflation. For cost-push inflation, it lists increases in costs of raw materials, speculation, natural calamities, and imports restrictions. The document then discusses several methods to control each type of inflation including decreasing government spending, increasing taxes and interest rates, ensuring adequate supply, population control, and changing consumption patterns for demand-pull inflation. For cost-push inflation, it recommends controlling wages, monopolies, subsidizing producers, and using monetary policy tools. The document concludes with the

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89 views12 pages

Inflation and Monetary Policy

This document defines inflation and discusses different types of inflation including demand-pull and cost-push inflation. It outlines various causes of each type of inflation such as increases in money supply, income, spending, wages, and population growth for demand-pull inflation. For cost-push inflation, it lists increases in costs of raw materials, speculation, natural calamities, and imports restrictions. The document then discusses several methods to control each type of inflation including decreasing government spending, increasing taxes and interest rates, ensuring adequate supply, population control, and changing consumption patterns for demand-pull inflation. For cost-push inflation, it recommends controlling wages, monopolies, subsidizing producers, and using monetary policy tools. The document concludes with the

Uploaded by

farhana nasreen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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INFLATION, AND MONETARY POLICY

Defining Inflation
Inflation in ordinary language means a process of rising prices. According to G. Acley. "a persistent and appreciable rise in the general level of arrange prices". According to - Crowther, "Inflation is a estate in which price of money is falling ". In the Keynsian sense, true inflation begins when the elasticity of supply of output in response to increase in money supply has fallen to zero.

Classification of inflation
Demand pull inflation: An increase in effective demand unmatched by total supply available at the current prices will exert its influence in raising prices. This is technically termed as Demand-pull inflation. Cost push inflation : A rise in the price level may be initiated by growing factor costs. This is technically called Cost-push inflation.

Causes of demand-pull inflation


Increase in money supply; Increase in disposable income of the community; Increase in communitys aggregate spending on consumption and investment goods; Increase in salaries, wages and dearness allowances; Increase in population Deficit financing War financing

How to control Demand-pull inflation


1. By decreasing govt. expenditure ` Govt. itself is big buyer or creator of demand. Reduction in govt. expenditure obviously reduce the demand for goods in the narket and help controlling inflation. 2. By increasing tax : Increase of taxes will reduce the disposable income in the hands of the public. As a result demand for goods will be reduced.

How to control Demand-pull inflation


3. By incresing the rate of interest: If the rate of interest is increased then people in general will be encouraged to save more in the form of bank deposit and various deposit schemes. Increase in savings will reduce the consumption expenditure of the people. On the other hand, higher rate of interest will be discouraging factor for the borrowers which in turn will reduce the demand for money and thereby improve the inflationary situation.

How to control Demand-pull inflation


4. By ensuring Adequate Supply : If adequate supply of commodities could be ensured either by increasing production or import then demandpull supply could be controlled. On the other hand, 5. Population control: Demand-pull inflation could also be controlled partly by controling the growth of population.

How to control Demand-pull inflation


6 Changing consumption pattern: Demand for particular goods and services could be reduced by changing the consumption habits of the people. For example, demand for rice could be reduced by encouraging people to consume potato in lue of rice

Causes of Cost Push inflation


Increase in cost: Increase in cost of raw materials and other direct expenses. Deficiency in capital equipment Scarecity of complementary factors of production like skilled labour or technicians, essential raw materials or dynamic entrepreneurs.

Causes of Cost Push inflation


Excessive speculation: that results tendency to hoarding and profiteering on the part of the producers and traders; Increase in export of essential commodities Drought , famine or any other natural calamities. Prolonged industrial unrest. Decrease in import due to war restriction on import.

Control of Cost Push Inflation


By Controlling wages By Discouraging monopoly business By Controlling price through fiscal measures and subsidy to producers By Decreasing interest rate. By Monetary measures. Like Bank rate policy, Legal reserve ratio and Open market operation.

Islamic Concept of Inflation


Inflation is unacceptable to Islam Inflation is permissible to a very limited scale only a. if it is unavoidable or b. necessary for the sake of development An Islamic Govt should not do anything to create inflation An Islamic Govt should do everything to control inflation

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