Page 199 - DECO402_Macro Economics

Macroeconomic Theory

Notes and services when they are available. Long period of control increases the pent up demand so much
that control becomes ineffective and black market is created. Hence under suppressed inflation, prices
are stopped from increasing in an unstable manner, though the volcanic powers increasing the prices
are present. They may erupt any moment, if they find an opportunity to do so, result of which will
be open hyper inflation.
Due to suppressed inflation there may be deviation in demand from one kind of product to another
kind of product. Since it is not possible to ration and control each product, hence excess money saved
may be spent on uncontrolled and non-rationed objects. In some circumstances, it may deviate expense
to those paths also which are considered to be unproductive.
There are many risks of suppressed inflation. First is created by administrative problems, especially
when administration is incapable and corrupt, as a result of which black marketing happens. Second,
it induces unreasonable deviation of productive resources of the country from industries producing
necessary products in a stable manner, to industries producing unnecessary products (whose prices
are not controlled). At the end, control increases the attraction towards leisure. When a person, with
his present income, cannot freely purchase all those things that he wants to buy, then reduction in its
production and inflation will be created.

3. On Basis of Causes

On the basis of causes, inflation is of five types-
a. Credit inflation: Banks create credit on the basis of derivative deposits created from primary
deposits of the customers and loans and advances given by the banks. Without increase in
production extending supply of credit money, banks create credit inflation.
b. Currency Inflation: Inflation created by excessive flow of currency is called currency inflation.
It is found when without favourable and justified demand for purchasing goods and services,
government issues more currency.
c. Deficit induced inflation: When government’s expense is more than its inflow, then this
difference is filled by deficit financing. Through it increase in money supply will be created,
no matter what technique is applied for achieving this objective. Inflation happening as a
result of increase in prices is known as budget inflation.
d. Demand Pull inflation: The most general and important cause of inflation is the pressure
of ever increasing demand on stable of slowly increasing goods and services. On supply
remaining constant, increase in group demand will raise the prices. Demand pull inflation
is created when on present prices, in comparison to available supply, excess demand is
there. It has been made clear in figure 22.1. Here axis X shows the income or production,
whereas axis Y measures the price level. Collective supply curve moves upward from the
right, unless it does not become vertical at full employment level at OF production, since
due to increase in demand, collective demand curve moves upwards from D to D , D , D
1
3
4
2
and D . Price level increases from OP to OP , OP , OP and OP . It is seen that initially price
1
5
2
4
3
5
and production, both increase. Once collective supply curve attains the full employment
level at point C, further increase in collective demand curve from D to D will happen only
5
4
through price level. This is known as demand pull inflation. Various factors are responsible
for demand side inflationary pressure.
The main source of inflation is increase in quantity of money. As a result of increase in demand
deposits and extension of credit by the banks, quantity of money increases, because of which level of
income increases. Such increase increases the price of goods. Money supply may also increase when
government takes support of deficit financing for financing its developmental schemes by taking loans
from the central and commercial banks. Extension in collective demand may happen as a result of fast
192 LOVELY PROFESSIONAL UNIVERSITY