1. Inflation, Deflation and Stagflation
CH # 5

2. 1 2 3 4 Terms to know Inflation, Sources of inflation and its Remedies
Deflation, Causes of deflation, Measure to
control deflation
Reflation and Disinflation 3 4
Stagflation, Causes of stagflation, Measure to
control stagflation

3. Deflation In the words of Prof. Crowther;
“Deflation is that state of the economy where the value of money is rising or prices are falling.”
If the general level of prices falls and as a result thereof, the value of money increases, it is called deflation in economics.
Deflation is just the opposite of inflation.

4. Causes of Deflation:
Deflationary situation may occur due to the following terms;
Private investment
Persistent unfavorable balance of payments
Continued Govt.-budgetary surpluses
Increase in the total output
To rise the discount rate by the Central Bank
By selling securities

5. Measure to control deflation
Prof. J. M. Keynes are strongly of the view that prices can be stabilized more by fiscal measures than by monetary steps.
The Govt. adopt the following methods to control the deflation situation:
Increase public spending
Reducing taxes
Stimulating private investment
Private consumption
increase the living standard of the people

6. Reflation
Reflation is a state of a moderately rising general prices when efforts are made by the Govt. to lift the economy out of depression.
This upward rising in general prices is characterized by expanding production, rising consumers expenditures, the usage of machinery and increasing profit.

7. Disinflation
The process or methods through which prices are brought down without causing unemployment and reducing output.
Disinflation occurs after the level of full employment is reached in the economy.

8. Diagram Diagrammatical representation: Economic Activity Time (years)
Inflation
Disinflation
Full Employment
Economic Activity
Reflation
Deflation
Depression
Time (years)

9. Stagflation In the words of Michael swan;
“Stagflation can be described as a contraction or stagnation of a nation’s output accompanied by rise in the price level.”
Stagflation is a more serious problem than inflation.
When the economy is hit by declining output, it depressed the economy of a whole country with growing unemployment.

10. Causes of stagflation
According to the modern economists, the main cause of stagflation is the reduction in aggregate supply.
The reduction in AS may be due to the following factors;
Reduction in Labor supply
Increases in taxes
Resources costs

11. Causes of stagflation
the phenomenon of stagflation is illustrated in the following diagram:
AS1
Cost/tax/wage AS P1 P AD L1 L
Employment

12. Measures to control of stagflation:
There are number of measures which can be adopted to slow down the rise in the general price level and maintain the general price level.
The should make every effort that minimum wages are not raised during stagflation.
The increase in money wages should be linked with increase in productivity.
The personal and business taxes should be reduced to bring down the costs of goods.
The Govt. itself should take up development programs to create jobs in the country

13. Thank You!
By M. Ihsan
End of Ch # 5