It redistributes income and wealth in favour of some and greatly harms others. And the Central Bank, if it is committed to keep the interest rate constant so that private investment does not decline, will further expand the money supply which will cause further inflation.
The higher rate of interest on savings and fixed deposits will induce more savings by the households and help in cutting down aggregate consumption expenditure. Inflation leads to a number of other effects which are discussed as under: As a result of either of these responses, aggregate demand curve shifts to the right from AD0 to AD1.
A developed country may be able to handle the problem of adverse balance of payments through structural adjustment, but a developing country is not able to do so easily because they suffer from large institutional and other rigidities. An important effect of inflation is that it redistributes income and wealth in favour of some at the cost of others.
Hyperinflation not only has disruptive redistribute effect, it also brings about economic crisis and may even cause collapse of the economic system. It is generally believed by most of the economists that whatever be the initial cause of inflation demand- pull, cost-push or inflationary expectationsfor the price level to continue rising, period after period, it must be accommodated by expansion in money supply.
Keynes explained inflation as arising out of real sector forces. Similarly, unanticipated inflation harms the individuals, who retire on pensions fixed in rupee terms.
Suppose a firm issues a new catalogue listing prices of its products once in a year, say in the month of January of every year. According to the structuralist school of thought, the above bottlenecks and constraints are rooted in the social, political and economic structure of these countries.
Therefore, rather than withdrawing a large amount of currency from banks at a time, they will withdraw less money which is sufficient for meeting daily expenses for a few days, say for a week.
Besides, resources gap in the private sector due to inadequate voluntary savings and underdevelopment of the capital market have led to their larger borrowings from the banking system which has created excessive bank credit for it. This implies that those who held claims on assets fixed in nominal terms intheir real value in terms of purchasing power would have declined significantly.
Consider the value of assets fixed in nominal terms. A stronger inflation is more difficult to control than a mild one. The Indian experience during when foreign exchange reserves declined to abysmally low level and created an economic crisis in the country, shows the validity of this argument.
These unproductive forms of wealth do not add to the productive capacity of the economy and are quite useless from the viewpoint of economic growth. First, as seen above, when due to rapid inflation value of money is declining, people will not like to keep money with themselves and will, therefore, be eager to spend it before its value goes down heavily.
Thus cost-push inflation not only causes rise in price level or inflation but also brings about fall in GDP level. Those, especially banks, who buy these securities, will make payment for them in terms of cash reserves.
An important social cost of inflation, especially in developing countries, is its bad effect on long- run economic growth.
First, it can affect the cost of credit and second, it can influence the credit availability for private business firms. Those, especially banks, who buy these securities, will make payment for them in terms of cash reserves. However, in its last phase, it is not longer able to do so because money ceases to bean acceptable store of value.
The extent to which they will be gainers or losers on the whole is a very complicated calculation.
On the other hand, monetarists explain the emergence of excess demand and the resultant rise in prices on account of the increase in money supply in the economy.
India's Parliament has raised interest rates in an effort to slow inflation, but many economists think that increasing agricultural production and improving supply within the country is a more long-term solution to the problem of inflation.
Inflation refers to a situation when there is an overall increase in the prices of goods leading to a general decline in the value of money.
Inflation is phenomena marked by an excess of money supply over the demand for it, that is to say, an excess of the supply of currency and credit over the actual requirements of trade, commerce and industry.
Inflation in India: Causes, Effects and Curve! Meaning of Inflation: By inflation we mean a general rise in prices.
To be more correct, inflation is a persistent rise in the general price level rather than a. India's Parliament has raised interest rates in an effort to slow inflation, but many economists think that increasing agricultural production and improving supply within the country is a more long-term solution to the problem of inflation.
Inflation is a situation wherein there are continuous increases in the price level of goods and services in an economy over a period of time.
In a lay man language inflation, could be defined as. Inflation is a situation wherein there are continuous increases in the price level of goods and services in an economy over a period of time.
In a lay man language inflation, could be defined as.What are the effects of inflation in india