Page 184 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 10: Theories of Inflation

10.4 Summary Notes

Inflation is defined as a sustained increase in the price level or a sustained fall in the value
of money.

Inflation in India is explained by various factors, viz., excessive aggregate demand,
imbalance between the sectoral demand and supply, cost factors including rising import
prices and rate of expansion of money.
There are various types of inflation that can occur in an economy, namely, open, suppressed,
creeping, galloping, hyper, demand pull and cost push.
The quantity theory of money’s basic prediction is that there is a stable and proportional
relationship between changes in the money supply and the price level.

Demand pull inflation occurs when aggregate demand rises more rapidly than the
economy’s productive potential, pulling prices up to equilibrate aggregate supply and
demand.

The supply or cost analysis of inflation also known as the “new-inflation theory” maintains
that inflation occurs due to an increase in the cost or supply price of goods caused by
increases in the prices of inputs.
Some economists argue that there cannot be such a thing as a cost push inflation because
any increase in costs without an increase in purchasing power and demand would lead to
unemployment and depression, and not to inflation.

10.5 Keywords

Cost Push Inflation: A type of inflation caused by substantial increases in the cost of important
goods or services where no suitable alternative is available.
Creeping Inflation: A moderate rise in prices i.e. 2-3 per cent per annum.
Demand Pull Inflation: Describes the scenario that occurs when price levels rise because of an
imbalance in the aggregate supply and demand.
Galloping Inflation: Prices rise at double or treble digit rates per annum (20-100%).
Hyper Inflation or Run-away Inflation: Price rise to the tune of a thousand or a million or even
a billion per cent per year.
Inflation: A rise in the general price level.
Suppressed Inflation: A type of inflation where the upward pressure on prices is not allowed to
influence the quoted or managed prices.
Wage-push Inflation: When wages rise faster than labour productivity.

10.6 Review Questions

1. Define inflation. How is a general rate of inflation calculated in an economy?

2. Describe different types of inflation that can occur in an economy.
3. Is inflation always bad? Justify your answer giving suitable arguments.
4. Explain the Quantity Theory of Money.
5. Discuss the basic concept of demand pull inflation.

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