Inflation, Deflation and Stagflation
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Transcript Inflation, Deflation and Stagflation
Inflation, Deflation
and Stagflation
CH # 5
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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
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.
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Causes 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
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Measure to control deflation
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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
Reflation
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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.
Disinflation
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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.
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Diagram
Diagrammatical representation:
Economic Activity
Inflation
Disinflation
Full Employment
Reflation
Deflation
Depression
Time (years)
Stagflation
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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.
Causes of stagflation
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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
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Causes of stagflation
the phenomenon of stagflation is illustrated in the
following diagram:
AS
1
Cost/tax/wage
AS
P1
P
AD
L1 L
Employment
Measures to control of stagflation:
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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