Page 195 - DECO402_Macro Economics

Macroeconomic Theory Pavitar Parkash Singh, Lovely Professional University

Notes Unit-22: Inflation

Contents
Objectives
Introduction
22.1 Inflation
22.2 Types of Inflation
22.3 Inflationary Gap
22.4 Effects of Inflation
22.5 Control of Inflation
22.6 Summary
22.7 Keywords
22.8 Review Questions
22.9 Further Readings

Objectives

After studying this unit, students will be able to:
y Know the Inflation,
y Know the Inflationary Gap,
y Know the Effects of Inflation,
y Know the Control of Inflation.

Introduction

Money’s power to make the goods and services of the people worth buying provides it value. In this
way, value of money reflects the right of money on the goods and services. It may be expressed in
form of purchasing power of money. Change in value of money is reflected in change in value level. As
has been explained in previous chapter of quantity theory, value of money and price level is inversely
related. With increase or decrease of value of money, price level decreases or increases respectively.
According to it, condition of inflation or deflation is created. Because this change of value influences
all those people, who trade with the help of money, hence it is important to understand the event of
inflation or deflation.

22.1 Inflation

Word inflation has been used in many expressions. It is very difficult to give a generally acceptable,
precise and scientific definition of this word. When representative note money (Pratinidhi Patra Mudra),
completely supported by gold and silver was in circulation, then inflation was considered to be such
condition, in which quantity of money in circulation supporting it is more than quantity of reserves.
Slowly this concept of inflation was left and inflation was started to be known as a condition in which

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