Inflation, Deflation and StagflationInflation, Deflation and Stagflation

CH # 5

LOGOTerms to know

1

2

Reflation and Disinflation 3

4

Inflation, Sources of inflation and its Remedies

Deflation, Causes of deflation, Measure to control deflation

Stagflation, Causes of stagflation, Measure to control stagflation

LOGODeflation

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.

LOGOCauses 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

LOGOMeasure 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

LOGOReflation

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.

LOGODisinflation

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.

LOGODiagram

Diagrammatical representation:E

co

no

mic

Ac

tiv

ity

Depression

Reflation

Inflation

Disinflation

Full Employment

Deflation

Time (years)

LOGOStagflation

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.

LOGOCauses 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

LOGOCauses of stagflation

the phenomenon of stagflation is illustrated in the following diagram:

AD

AS

AS1

P

P1

LL1Employment

Cost/tax/wage

LOGOMeasures 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

End of Ch # 5

By M. Ihsan