INFLATION, DEFLATION,STAGFLATION,

REINFLATION,DISINFLATION

GROUP MEMBERS

NAUMAN HASSAN

NAQASH AHMED

RAFI ULLAH

SYED GHULAM

INFLATION

Inflation is the process in which there is a continuous increase in the general price level and the money is continuous losing its value.

or

Inflation is a continuous upward movement in the general price level

CAUSES OF INFLATION

• The two main sources of inflation are;

1. Demand pull inflation.

2. Cost push inflation.

DEMAND PULL INFLATION

• Demand pull inflation is also called aggregate demand inflation. When aggregate demand increase faster than aggregate supply of goods and services the prices of goods tend to rise. Such a situation where aggregate demand persistently exceeds aggregate supply of good at current prices so that the price level is pulled up is known as INFLATION

CONTINOUS INCREASE IN THE MONEY SUPPLY

CONTINOUS INCREASE IN THE AGGREGATE DEMAND

CONTINOUS INFLATION

DEMAND PULL INFLATION AND FULL EMPLOYMENT

1

2

3

COST PUSH INFLATION

A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials.

• Aggregate supply is the total volume of goods and services produced by an economy at a given price level. When there is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production, we have cost-push inflation. Cost-push inflation basically means that prices have been "pushed up" by increases in costs of any of the four factors of production (labor, capital, land or entrepreneurship) when companies are already running at full production capacity. With higher production costs and productivity maximized, companies cannot maintain profit margins by producing the same amounts of goods and services. As a result, the increased costs are passed on to consumers, causing a rise in the general price level (inflation).

GRAPHS

DEFLATION

• Deflation is commonly defined as a decrease in the general prices of goods and services within a given economy. Unlike disinflation, or a slowdown in the rate of inflation, deflation occurs when the rate of inflation actually falls below zero percent, indicating a negative rate of inflation. The result of deflation is an increase in the real value of money relative to goods and services.

CAUSES OF & SOLUTIONS TO DEFLATION

• Deflation is commonly caused by a fall in aggregate demand (or increase in supply of) goods and services and/or a lack of money supply. When prices react by falling even lower, consumers tend to curb their spending until prices bottom. Unfortunately, this leads to less production at factories, less investment and a so-called deflationary spiral.

• An example of this occurring is the U.S. Great Depression, where the demand for goods fell at the same time saving increased and the money supply was reduced. While such saving would seem positive, deflation can lead to a transfer of wealth away from borrowers (which most people are) and can cause inefficient investment due to confusing pricing signals.

• Deflation can be counteracted in a number of different ways, but the methods remain debatable among various economic camps. At its heart, injecting more capital into an economy will generally reverse deflation, since it addresses the only controllable part of the equation. This can be done in many ways, including most recently the so-called quantitative easing approach.

KEY TAKE AWAY POINTS

• Deflation is commonly defined as a decrease in the general prices of goods and services within a given economy.

• Deflation is commonly caused by a fall in aggregate demand (or increase in supply of) goods and services and/or a lack of money supply.

• Deflation generally causes stocks to decline, government bonds to increase and corporate bonds to potentially decrease.

STAGFLATION

A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation.

• Stagflation occurs when the economy isn't growing but prices are, which is not a good situation for a country to be in. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the U.S., stagnation increased the inflationary effects.

CAUSES OF STAGFLATION

• Stagflation is an economic trend in which inflation and unemployment rise while general growth of the economy is slow. It can be difficult to correct this trend, because focusing on one aspect of the problem can exacerbate other aspects.

• Many governments try to avoid stagflation through fiscal policy, by promoting even and healthy growth and attempting to prevent inflation. If the condition continues long enough, it will trigger an economic recession and an ultimate self-correction.

• stagflation is so dangerous. Imagine a scenario in which you have both a sinking economy and runaway inflation.

• Slowdown in labor productivity growth

• The cumulative effect of several years of higher-than-expected inflation.

• Decreasing prices of raw materials, leading to a downward shift of the short-run Phillips curv

REFLATION

• A fiscal or monetary policy, designed to expand a country's output and curb the effects of deflation. Reflation policies can include reducing taxes, changing the money supply and lowering interest rates.

• Reflation is an economic term referring to stimulating measures taken to lessen or stop the effects of deflation. Reflationary measures can consist of fiscal policy (lowering taxes) or monetary policy (changing money supply or lowering interest rates).

• For example, the Federal Reserve may choose to lower interest rates to jump start a weak economy common in deflationary periods.

DISINFLATION

• A slowing in the rate of price inflation. Disinflation is used to describe instances when the inflation rate has reduced marginally over the short term. Although it is used to describe periods of slowing inflation, disinflation should not be confused with deflation.

EXPLAINATION

• Disinflation is commonly used by the Federal Reserve to describe situations of slowing inflation. Instances of disinflation are not uncommon and are viewed as normal during healthy economic times. Although sometimes confused with deflation, disinflation is not considered to be as problematic because prices do not actually drop and disinflation does not usually signal the onset of a slowing economy.

GRAPH