Inflation Inflation is always accompanied by a rise in the price. inflation is an uninterrupted increase in prices. Inflation is a monetary phenomenon and is generally caused by excessive money supply. Inflation is a dynamic process as observed over the long period. A cyclical movement of prices is not inflation.

Definition of Inflation According to Crowther, “ Inflation is a state of generally rising prices and falling value of money.” According to Shapiro, “ Inflation is a persistent and appreciable rise in the general level of price.”

Classification of inflation On the basis of speed Creeping inflation. Walking inflation. Running inflation. Galloping or hyper-inflation.

On the basis of inducement wage-induced inflation. Profit-induced inflation. Scarcity-induced inflation. Deficit-induced inflation. Currency-induced inflation. Credit-induced inflation. Foreign trade-induced inflation.

Comprehensive inflation. Sporadic inflation. On the basis of scope Comprehensive inflation. Sporadic inflation. On the basis of govt. Reaction Open inflation. Suppressed inflation. On the basis of employment level Partial inflation.( semi inflation) Full inflation. (true inflation)

On the basis of time Peace-time inflation. War-time inflation. Post war time inflation.

Related concepts Cost push inflation. Demand pull inflation. Disinflation. Deflation. Reflation. Stagflation. agflation

Causes of inflation Increase in money supply. Increase in govt. Expenditure. Increase in private expenditure Reduction in taxation. Increase in exports. Increase in population. Paying off debts. Black money.

Supply side factors Scarcity of factors of production. Hoarding. Natural calamities. Increase in exports. Law of diminishing returns. War. International causes.

Controlling of inflation Monetary policy Increasing bank rate Sale of govt. Securities. Higher reserve ratio. (cash reserve ratio, statutory liquidity ratio.) Repo rate and reverse repo rate. Selective credit control. Consumer credit control. Higher margin requirements.

Fiscal policy Increasing in taxation. Reduction in public expenditure. Increase in public borrowing Control of deficit financing. Postponement of paying debt. Surplus budgets.

Other measures Expansion of output. Proper wage policy. Encouragement to saving. Population control.

Effects of inflation Disrupts price system. Reduces savings. Discourages foreign capital. Encourages hoarding. Encourage speculative activities. Affects the pattern of production. Quality falls.

Effects on distribution Debtors and creditors. Fixed income groups. Business community. Investors. Farmers.

Retarding effects Distorts saving habits. Discourages foreign capital. Discourages investment. Stimulates speculative activities. Creates balance of payment problems. Raises cost of development projects. Creates uncertainty .

Business cycles Definition Keynes:- a trade cycle is composed of periods of good trade characteristics by rising prices and low employment percentage, altering with periods of bad trade characteristics by falling prices and high employment percentage. Estey:- cyclical fluctuations are characteriised alternating waves of expansion and contraction. They do not have a fixed rhythm but they are cycles .

Business cycles Fluctuations are wave-like movements. Fluctuations are recurrent in nature. They are non-periodic or irregular They occur in such aggregate variables as output, income, employment , etc. They are not seasonal fluctuations.

boom Income or production is the maximum. The economy reaches the full employment levels by removing unemployment. Prices rise and the wages rates are very high. Traders and industrialists earn huge profits. There is expansion in bank credit. There is increase in consumption expenditure and consequently demand also increases. Rate of interest rises. Rise in profits is higher than interest rates.

Recession There is fall in income, employment and output. Prices and wages begin to fall. Demand for borrowings slides down, despite, fall in interest rates. There is contraction of bank credit. Fall in investment and income. Demand for consumer goods fall. There is a feeling of doubt and fear among people.

Depression Level of output and income is very low. employment is also very low. Wages, interest, prices and other costs decline. Volume of profitability falls sharply. Inducement to invest is very low. cash reserves with the banks pile up and the demand for the credit falls. Old and worn out machines are not replaced. Hence demand for capital goods falls. Demand for consumer goods falls. People grow pessimist and it affects economy adversely.

Recovery Replacement investment results into increase in income and output. Employment increases. Demand for consumption and production of goods rises. Prices begin to rise and there are more profits. Costs increase relatively less. Investment increases. Demand for the bank loans increases. Pessimism gives place to optimism.