Muhammad Aamir KiyaniMuhammad Aamir Kiyani

Inflation?Inflation?

Continuous Continuous riserise inin

pricesprices

Types of Types of Inflation Inflation according according to to RATE RATE

““When the rise in When the rise in prices is very low prices is very low like that of a snail like that of a snail

or creeper, is or creeper, is called Creeping called Creeping

Inflation”Inflation”

Prices rise Prices rise moderatelymoderately

Prices rise rapidlyPrices rise rapidly

Also called Runway or Galloping inflationAlso called Runway or Galloping inflation

Immeasurable and uncontrollableImmeasurable and uncontrollable

Prices rise very fast Prices rise very fast at double or triple at double or triple digit rate.digit rate.

Also called Runway Also called Runway or Galloping or Galloping InflationInflation

Quantity TheoryQuantity TheoryDemand Pull TheoryDemand Pull TheoryCost Push theoryCost Push theory

Quantity theory:Quantity theory:The quantity theory of inflation states that The quantity theory of inflation states that too much too much money money in the economy leads to the in the economy leads to the inflation.inflation.

%change in the money supply same % change in the overall price %change in the money supply same % change in the overall price levellevel

Y= total output producedM=amount of money available in an economyV=the velocity of moneyP=the overall price level in an economy

Demand Pull Demand Pull Inflation:Inflation:

When the aggregate When the aggregate demand increases more demand increases more

than the supply.than the supply.

Amount House hold (increase)

Demand (increase)

Prices (increase)

Demand Pull causesDemand Pull causes

• Increase in the money supplyIncrease in the money supply

• Increase in populationIncrease in population

• Gov. expenditureGov. expenditure

• Credit creationCredit creation

Cost Push Inflation:Cost Push Inflation:

When cost of production When cost of production increases the price level increases the price level automatically increases.automatically increases.

Cost push causes:Cost push causes:Increase in indirect taxesIncrease in indirect taxes

Increase in prices of raw Increase in prices of raw materialmaterial

Shortage of supply FOPShortage of supply FOP

Devaluation of moneyDevaluation of money

• Monetary MeasuresMonetary Measures

• Fiscal MeasuresFiscal Measures

Monetary MeasuresMonetary Measures• Bank rate policy (interest rate Bank rate policy (interest rate

increase)increase)

• Contraction money supplyContraction money supply

• Open market operationOpen market operation

• Variable reserve ratioVariable reserve ratio

• Credit rationingCredit rationing

Fiscal measuresFiscal measures

• Higher direct taxes (causing a fall in disposable Higher direct taxes (causing a fall in disposable income)income)

• Lower Government spendingLower Government spending

• A reduction in the amount the government sector A reduction in the amount the government sector borrows each year (PSNCR)borrows each year (PSNCR)

• Direct wage controls - incomes policiesDirect wage controls - incomes policies

Any Question?