Infaltion(Main Slide)

8/8/2019 Infaltion(Main Slide)

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Topic

Inflation

Presented by:

Jannatul Ferdous Mst. Fahima Akter Md. Saidur Rahman Dharitry Roy Kh. Sajidur Rahman Zerin Tasneem Zeem

Md. Sakib Hossain

Submitted to:

Prof Dr. Md. Aftarauzzaman khanChowdury.


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Overview of topics

Defination and impact inflation

Categories of inflation

Modern inflation theory

Dilemmas of Anti-inflation policy

Measurement of inflation

Inflationary GAP

Analysis of inflationary pressure

Anti-inflationary measures

Conclusion


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Definition and Impact Inflation

When the general level of price is rising then it called inflation.

By using price indexes inflation is calculated.

The rate of inflation is the percentage change in a price index

from one period to the next. The major price indexes are the

consumer price index(CPI) and the GDP deflator.

The GDP deflator is the price of GDP.


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Rate of inflation

The rate of inflation is the percentage change in the price level.

If P0 is the current average price level and P 1 is the price level

a year ago, the rate of inflation during the year might bemeasured as follows:

Inflation rate = ------------------ x 100

P0 P-1

P-1

The rate of inflation is the percentage change in the price level.

If P0 is the current average price level and P 1 is the price level

a year ago, the rate of inflation during the year might bemeasured as follows:

Inflation rate = ------------------ x 100

P0 P-1

P-1


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Categories of Inflation

There are three types of inflation

Low inflation Galloping inflation

Hyper inflation


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Low inflation

Low inflation is characterized by prices that rise slowly

and predictably . We can define as single digit annual

inflation rates or when the prices of goods and services

do not increase rapidly its called low inflation.

Most industrial countries have experienced low inflationover the last decade.


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Galloping inflation

According to Samuelson, when prices are rising at in the

double, or triple-digit range of 10, 100, or 200 percent, is called

galloping inflation.

In these conditions, money loses its value very quickly, so

people hold on to only the bare-minimum amount of money

needed for daily transactions.

Argentina, Brazil and Israel, for instance, have experienced

inflation rates over 100 per cent in the eighties. Galloping inflation

is really a serious problem. It causes economic distortions and

disturbances.


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Hyperinflation

Hyperinflation takes over when the printing presses

spew out currency and prices start rising many times

each month. Historically hyperinflations have almost

always been associated with war and revolution.

In 1922, inflation in Austria reached 1426%. From 1914

To January 1923, the consumer price index rose by a

factor of 11836. With the highest banknote in

denominations of 500,000.


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Hyperinflation

Sweeping up the banknotes from the street after the Hungarianpeng was replaced in 1946


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Modern inflation theory

The inertial rate of inflation is a short-run equilibrium and

persists until the economy is shocked. Inflation affects the

economy by redistributing income and wealth and by

impairing efficiency. It hurts creditors, fixed-income

classes and timid investors.

Inertial inflation

Demand pull inflation

The Phillips curve

Cost push inflation

NAIRU Inflation


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Inertial inflation

In modern industrial economies inflation has great

momentum and tends to persist at the same time. This

expected rate of inflation was build into the economys

institution. Wage agreements between labor and

management were designed around this rate, government

monetary and fiscal plans assumed this rate.


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Demand Pull Inflation

Demand Pull Inflation

Demand Pull Inflation occurswhen aggregate demand rise faster

than the economys productivepotential

Real Output

Price

Le

vel

P

P1

AD

AS

AD1

Qp

Potential Output


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Cost Push Inflation

Cost Push Inflation

Cost Push Inflation occurswhen there is a shock to the

aggregate supply curve, shifting it tothe left.

Real Output

Price

Le

vel

P

P1

AD

AS

AS1


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The Phillips Curve

The Phillips curve shows the relationship between inflation and

unemployment. In the short run, lowering one rate means raising

the other. But the short-run Phillips curve tends to shift over time

as expected inflation and other factors change.

Inflation affects the economy by redistributing income and wealth

and impairing efficiency.

It hurts creditors, fixed-income classes, and timid investors.


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The NAIRU Cruve

Modern inflation theory on the concept of the non accelerating of inflation

rate of unemployment, or NAIRU, which is the lowest sustainable

unemployment rate that the nation can enjoy without risking an upward

spiral of inflation. It represents the level of unemployment of resources at

which labor and product markets are in inflationary balance. Under the

NAIRU theory, there is no permanent tradeoff between unemployment and

inflation, and long-run Phillips curve is vertical.

Inflation leads to distortions in relative prices, tax rates, and real interest

rates.

When central banks take steps to lower inflation, the real costs of such steps

in terms of lower output and employment can be painful.


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Dilemmas of Anti-inflation Policy

A central concern for policymakers is the cost of reducing

inertial inflation. Current estimates indicate that a

substantial recession is necessary to slow inertial inflation.

Economists have put forth many proposals for lowering

NAIRU, notable proposals include improving labor market

information, improving education and training programs,

and refashioning government programs so workers have

grater incentives to work.


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Measurement of inflation

In measuring inflation, the quantity type of measurement

is replaced by Keynes through the introduction of a newconcept-the inflationary gap.


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Inflationary Gap

The inflationary gap for the economy as a whole maybe

defined as an excess of anticipant expenditures over available

output at base prices.

If Real GDP is greater than Natural Real GDP, the economy

is in an inflationary gap.

Example:

Natural Real GDP is $13,000 billion Equilibrium Real GDP is $13,500 billion

The economy is in an inflationary gap.


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Inflationary Gap cont.

OGNP Y Y`

C=Y

C`+I`

C+I

C

E

E`

45


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Analysis of Inflationary Pressure

Inflationary pressure arises from both the demand side

and supply side. Demand here means the demand of

money income for things while supply means available

output for which money income can be spent. Thus

factor causing inflationary pressure fall into two groups:

A) Demand side

B) Supply side


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Demand side

On the major inflationary forces are:

The money supply Disposable income

Consumer expenditure and businessoutlays

Foreign demand


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Supply side

The factors affecting supply of goods and services are

the following:

Full employment and bottlenecks, An exports surplus,

Wage price surplus,

Expectation regarding future movement ofprice.


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Anti-inflationary messures

These measures aim at curing inflation. The cure lies in

removing causes if inflation i.e removing inflationary

pressure from the economy. Inflation therefore, should be

attacked on two fronts-on demand front and supply front.

There lines of action are commonly followed to combat

inflation:

Monetary

Fiscal

Other meassures.


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Monetary measure

These consist in income steps to reduce the existing

supply of money to relive pressure on prices due to

excess income . The important steps are:

Control of note issue-

Control of credit

Over valuation of currencies

Freezing of assets-


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Fiscal measures

A fiscal measure with respect to inflation includes all

the measures of a monetary nature which the government

adopts in connection with-

Taxes and

Government expenditures

Public borrowing


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Other measures

Other measures are :

Output adjustment

Wage policy

Price control and rationing

Control over speculation


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Conclusion

Inflation's effects on an economy are manifold and can be

simultaneously positive and negative. Negative effects of

inflation include a decrease in the real value of money

and other monetary items over time; uncertainty about

future inflation may discourage investment and saving, or

may lead to reductions in investment of productive

capital and increase savings in non-producing assets. e.g.selling stocks and buying gold.

Documents

Infaltion(Main Slide)