What is inflation?
A persistent increase in the general level of prices is known as inflation. If the price of one good has gone up, it is not inflation; it is inflation only if the prices of most goods have gone up.
What is Demand-Pull Inflation?
A mismatch between demand and supply pulls up prices. Either the demand increases over the same level of supply, or the supply decreases with the same level of demand and thus the situation of demand-pull inflation arise.
What is Cost-Push Inflation?
An increase in factor input costs (i.e., wages and raw materials) pushes up prices. The price rise which is the result of increase in the production cost is cost-push inflation.
What is creeping inflation?
Such inflation is slow and on predictable lines . It takes place in a longer period and the range of increase is usually in ‘single digit’. Such inflation has also been called as Low inflation.
What is Galloping inflation or Hopping inflation or Jumping inflation or Runaway inflation?
This is a very high inflation running in the range of double-digit or triple digit perhabs only for a brief period.
In the decades of 1970s and 1980s, many Latin American countries such as Argentina, Chile and Brazil had such rates of inflation—in the range of 50 to 700 per cent.
The galloping inflation is characterized by the rates of price growth that are higher than those of the moderate or creeping inflation, but lower than those of the hyperinflation.
As a rule, the galloping inflation is recognized as a price increase of 10–100% per year.
What is Hyperinflation?
It refers to a situation where the prices of goods and services rise uncontrollably over a defined period of time.
Hyperinflation goes beyond inflation. It is incredibly rapid inflation.
In general, the term is used when the rate of inflation increases at more than 50% a month.
Typically, hyperinflation is triggered by a very quick growth in the money supply.
What is Deflation?
Deflation is a decrease in general price levels throughout an economy.Deflation is the opposite of inflation
What is Disinflation?
Disinflation shows the rate of change of inflation over time. The inflation rate is declining over time, but it remains positive.
Disinflation is what happens when price inflation slows down temporarily.
Unlike deflation, this is not harmful to the economy because the inflation rate is reduced marginally over a short-term period.
Unlike inflation and deflation, disinflation is the change in the rate of inflation. Prices do not drop during periods of disinflation and it does not signal an economic slowdown.
What is Stagflation?
It is the state of a stagnant economy hampered not only by slow growth but by high inflation as well.
The combination of slow growth and inflation is unusual because inflation typically rises and falls with the pace of growth.
The high inflation leaves less scope for policymakers to address growth shortfalls with lower interest rates and higher public spending.
What is Structural inflation?
Inflation relating to a government’s monetary policy rather than to supply of and demand for goods and services.
What is Bottleneck inflation?
This inflation takes place when the supply falls drastically and the demand remains at the same level.
What is Core inflation?
Core inflation shows price rise in all goods and services excluding energy and food articles.
It refers to that component of inflation that is likely to persist for a long period, say, for several years and, therefore, useful for near-term and medium-term inflation forecasting.
Core inflation measurement is motivated by a desire to track and predict persistent inflation.
Food and energy prices tend to be quite volatile, so that, looking forward core inflation (which excludes food and energy prices) may be a better gauge than overall (headline) inflation of underlying inflation trends.
What is inflationary gap and when it exists?
An inflationary gap measures the difference between the current real GDP and the GDP of an economy operating at full employment.
The current real GDP must be higher than the potential GDP for the gap to be considered inflationary.
An inflationary gap exists when the demand for goods and services exceeds production due to higher levels of employment, increased trade activities, or elevated government expenditure. The real GDP can exceed the potential GDP, resulting in an inflationary gap.
What is Deflationary Gap?
It is a situation in which total spending in an economy is insufficient to buy all the output that can be produced with full employment.
What is Inflation tax?
With the inflation tax, the government could increase prices either by increasing taxes on essential commodities or asking the Central bank to print more money. The result of increasing such taxes is that they get passed on to consumers as general increase in prices.
The inflation tax is the most non-transparent of all taxes in that the way in which the tax is paid is not well understood and the amount of real revenue (or purchasing power) obtained by the government is difficult to calculate.
What is inflation targeting?
In this framework, a central bank estimates and makes public a projected, or “target,” inflation rate and then attempts to steer actual inflation toward that target, using such tools as interest rate changes. https://www.imf.org/external/pubs/ft/fandd/basics/72-inflation-targeting.htm
Because interest rates and inflation rates tend to move in opposite directions, the likely actions a central bank will take to raise or lower interest rates become more transparent under an inflation targeting policy.
PRACTICE QUESTIONS
QUES 1. Consider the following statements: UPSC 2013
(1) Inflation benefits the debtors.
(2) Inflation benefits the bond-holders.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: (a) EXPLANATION: Inflation brings benefit to borrowers or debtors while the profit on the bonds gets eroded . Higher the inflation lower the return on bonds through interest.
QUES 2 . A rise in general level of prices may be caused by: UPSC 2013
(1) an increase in the money supply
(2) a decrease in the aggregate level of output
(3) an increase in the effective demand
Select the correct answer using the codes given below.
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
Answer: (d) EXPLANATION: 1st statement is correct as increase in money supply will cause inflation. 2nd and 3rd statement are obviously correct as they represent supply and demand side of products.
QUES 3 . Which one of the following is likely to be the most inflationary in its effect? UPSC 2013
(a) Repayment of public debt
(b) Borrowing from the public to finance a budget deficit
(c) Borrowing from banks to finance a budget deficit
(d) Creating new money to finance a budget deficit
Answer: (d) EXPLANATION: (b) and (c) option will lead to a decrease in the money supply in market. Between (a) and (d), (d) will have more inflationary effect than (a), as it will lead to an increase in total money supply in the market
QUES 4 . Supply of money remaining the same when there is an increase in demand for money, there will be: UPSC 2013
(a) a fall in the level of prices
(b) an increase in the rate of interest
(c) a decrease in the rate of interest
(d) an increase in the level of income and employment
Answer: (b) EXPLANATION: If the demand increase when the supply is same, it will lead to an increase in prices or in this case rate of interest to be charged.
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