Inflation Problem and Policies Class 12 Notes Economics

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Inflation Problem and Policies class 12 Notes Economics

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CBSE Revision Notes Class 12 Inflation Problem and Policies

By inflation in ordinary language, we mean a process of rising prices. Inflation is a situation of persistent and appreciable rise in prices, leading to fall in purchasing power of money. A chief measure of price inflation is the inflation rate. It is the annualised percentage change in a general price index over time.

Indicators of Inflation

1. Index Numbers of Prices

  • Wholesale Price Index(WPI)
  • Consumer Price Index(CPI)

2. Gross Domestic Product(GDP) Deflator

Types of Inflation

  1. Demand-pull Inflation
  2. Cost-push inflation

Demand Pull Inflation: Demand-pull inflation arises when there is an excess of demand for goods over their supply. When there is persistent increase in demand and supply does not increase proportionately then prices tend to rise.

Causes of demand pull Inflation are

a. Increase in public expenditure
b. Increase in investment.
c. Increase in money supply
d. Growth in black money
e. Increase in population
f. Erratic Agricultural growth
g. Deficit Financing
h. Credit Expansion

Cost-push inflation: Cost-push inflation occurs when rise in price is due to rise in the cost of production. In this type of inflation, demand factor plays a minor and supply factor plays an important role. Once, this type of inflation sets in one industry, it spreads to all other industries of an economy.

Main causes of cost-push inflation are

a. Higher wage rate
b. Higher profit margin
c. Higher taxes
d. Fall in the availability of basic inputs
e. Administered higher prices of inputs.
f. Agriculture price Policy of Govt.
h. Increase in the rates of Indirect taxes.

Causes of inflation

1. Demand factors
a. Growth of population
b. Rise in employment and income
c. Increase in pace of urbanisation.
2. Supply factors
a. Irregular agricultural supply
b. Hoarding of essential goods.
c. Rise in administered prices.
d. Agricultural price policy
e. Rising prices of imports
f. Inadequate growth of industrial production.
3. Monetary and fiscal factors
a. Rising levels of government expenditure.
b. Deficit financing.

Effect of Inflation

Micro-on Individual
a. Real income declines
b. Wealth value declines
c. Income redistribution causes social tensions.
Macro-On Economy
a. Hoarding and black marketing.
b. Speculation increases
c. Nominal pay increase
d. Higher tax bracket.
e. Deterioration of quality of goods and standard of living.

Policy measures to control inflation

(a) Monetary measures
i. A check on the supply of money
ii. Increases in rate of interest
iii. Decrease in the supply of credit
iv. By Raising cash reserve ratio and statutory liquidity ratio and by Open market operations
v. Increase in Bank Rate
vi. Open market Operation( selling of eligible security by RBI)
(b) Fiscal Measures
i. A check on the public expenditure
ii. Increase in taxes
iii. Public borrowings
(c) Physical or non-monetary measures
i. Increasing output or increasing imports
ii. Controlling money wages
iii. Price control and rationing.
iv. Check on hoarding.
v. Economic planning
vi. Population planning
(d) Price Policy
i. Price control on essential goods
ii. Procurement and support price.

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