Inflation Deflation and Stagflation CH 5 LOGO Terms

Inflation, Deflation and Stagflation CH # 5

LOGO Terms to know 1 2 3 4 Inflation, Sources of inflation and its Remedies Deflation, Causes of deflation, Measure to control deflation Reflation and Disinflation Stagflation, Causes of stagflation, Measure to control stagflation

Deflation v In the words of Prof. Crowther; “Deflation is that state of the economy where the value of money is rising or prices are falling. ” Ø If the general level of prices falls and as a result thereof, the value of money increases, it is called deflation in economics. Ø Deflation is just the opposite of inflation. LOGO

Causes of Deflation: v 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 LOGO

Measure to control deflation LOGO v Prof. J. M. Keynes are strongly of the view that prices can be stabilized more by fiscal measures than by monetary steps. Ø 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

Reflation LOGO v Reflation is a state of a moderately rising general prices when efforts are made by the Govt. to lift the economy out of depression. Ø This upward rising in general prices is characterized by expanding production, rising consumers expenditures, the usage of machinery and increasing profit.

Disinflation LOGO v The process or methods through which prices are brought down without causing unemployment and reducing output. Ø Disinflation occurs after the level of full employment is reached in the economy.

LOGO Diagram v Diagrammatical representation: Economic Activity Inflation Disinflation Full Employment Reflation Depression Time (years)

Stagflation v In the words of Michael swan; “Stagflation can be described as a contraction or LOGO stagnation of a nation’s output accompanied by rise in the price level. ” Ø Stagflation is a more serious problem than inflation. Ø When the economy is hit by declining output, it depressed the economy of a whole country with growing unemployment.

Causes of stagflation LOGO v According to the modern economists, the main cause of stagflation is the reduction in aggregate supply. v The reduction in AS may be due to the following factors; § Reduction in Labor supply § Increases in taxes § Resources costs

LOGO Causes of stagflation v the phenomenon of stagflation is illustrated in the following diagram: AS 1 Cost/tax/wage AS P 1 P AD L 1 L Employment

ØMeasures to control of stagflation: LOGO v 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

By M. Ihsan End of Ch # 5