Government then experiences a shortfall in investible resources. On the other hand, when the unemployment rate is more than 5 ½ per cent to the right of point A , the supply of labour is more than the demand which tends to lower wage rates. Finally, anticipated inflation may also be costly to the society. In the 20th century, similar concepts in Keynesian economics include the Non-Accelerating Inflation Rate of Unemployment and the. Some economists have argued that wage rates have not increased at a high rate of unemployment. What Causes Inflation in the Economy? To evaluate the consequence of inflation, one must identify the nature of inflation which may be anticipated and unanticipated.
A small rise in prices or a sudden rise in prices is not inflation since they may reflect the short term workings of the market. As a policy measure, it suggests reduction in aggregate demand to control inflation. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. The poor suffer the most from persistent rise in prices, especially of food-grains and other essential items. Thus redistribution of wealth in favour of the government accrues as a benefit to the tax-payers. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services to focus on profit and losses from currency inflation. Increase in government expenditure: Government expenditure in India during the recent years has been rising very fast.
Agricultural Bottlenecks: The first and foremost bottlenecks faced by the developing countries relate to agriculture and they prevent supply of food grains to increase adequately. Profit tends to rise during inflation. Thus depreciation of rupee causes cost-push inflation. As a result, the production cost of other sectors will rise and thereby push up the prices of their products. As there is already full employment, the increase in money wages leads to proportionate rise in prices. What else could cause inflation? The effect of inflation is not distributed evenly in the economy, and as a consequence there are hidden costs to some and benefits to others from this decrease in the purchasing power of money.
Cut down on inessentials when buying groceries. In both views inflation is of demand-pull variety. Above all, banks do not pay any interest on current account but charges interest on loans. Monetary policy can only be helpful in controlling inflation due to demand-pull factors. Curbing Inflation There are several reasons why we should worry about the spike in the inflation rate. So landless agricultural workers are losers. For government employees, their dearness allowance is increased.
Keynesians do not find any link between money supply and price level causing an upward shift in aggregate demand. In addition to fuel, if output growth in core industries such as steel, cement, coal declined as they did during 2011-12 in India, they create supply-side bottlenecks in various industries leading to supply-side inflation. Hyperinflation encourages speculative activity on the part of people and businessmen who shy away from productive activities, as they find it highly profitable to hoard both finished goods and materials on the basis of expectations of further rise in prices. This leads to rise in prices. And if they gather momentum and become unhandy they may bring the downfall of the government. For instance, increase in income leads to an increase in consumption spending which pulls the price level up. India is facing the problem of inflationary pressure because of the increase in Aggregate Demand while Aggregate Supply is respectively constant.
Inflation is socially harmful: By widening the gulf between the rich and the poor, rising prices create discontentment among the masses. In other words, inflation may be unanticipated when people fail to adjust completely. Thus when due to inflation relative prices of a firm vary during a year as compared to the overall price level, it causes distortion in production and therefore leads to microeconomic inefficiencies in resource allocation. By making the rich richer and the poor poorer, it militates against social justice. The two years 2012 and 2013 were in the top third of rainfall for India since 1871 — and they were among the two best years of agricultural production, and the two worst years for food inflation.
To be more correct, inflation is a persistent rise in the general price level rather than a once-for-all rise in it. Trying to control wages could help to reduce inflationary pressures. In this connection it is noteworthy that Prof. In many countries, employment contracts, pension benefits, and government entitlements such as are tied to a cost-of-living index, typically to the. Increases in the price level inflation erode the real value of money the functional currency and other items with an underlying monetary nature. Some economists have argued that inflation of a creeping or mild variety has a tonic effect on the long-run economic growth.
When there is a persistent rise in price level, the people need more and more money to buy goods and services. . T he rapid growth in consumption expenditure drove up total government expenditure, increasing the fiscal deficit. In India, the most important category in the consumer price index is Food and beverages 45. With supply of money remaining constant, the greater demand for money causes interest rate to rise.
Mundell—Tobin effect The laureate Robert Mundell noted that moderate inflation would induce savers to substitute lending for some money holding as a means to finance future spending. Increase in money supply: Over the last few years the rate of increase in money supply has varied between 15 and 18 per cent, whereas the national output has increased at an annual average rate of only 4 per cent. This leads to inflation in the economy. We discuss below the efficacy of the various policy measures to check demand-pull inflation which is caused by excess aggregate demand. Business firms will also fix prices of their products in accordance with the anticipated price rise. Disposable income may increase with the rise in national income or reduction in taxes or reduction in the saving of the people.