Chapter 11: ECONOMICS OF INFLATION - DEFLATION
Inflation Deflation Facts
Aggregate demand in an economy is the sum of Consumption
, investment , government procurement and net trade balance i.e. exports
minus imports. Aggregate consumption in an economy is
the total output by all firms in the country. When aggregate demand and
supply are equally matched we get stable economy.
When Aggregate demand exceeds aggregate supply in an economy the
inflationary gap is created as demand for goods exceeds supply. Since full
employment is assumed we cant create additional goods. Thus Demand
Pull creates a inflationary gap.
- Increased money supply
- Increased propensity to consume i.e. amount from income spent by
- increase in investment expenditure and exports.
When the Aggregate demand is less than aggregate supply we get
deflationary trend in economy. The supply has to be reduced to meet the
The reasons for deflationary gap are decreased money supply, reduced
government expenditure, increased propensity to save i.e. part of income
saved by households, increase imports.
Inflationary spiral is a chain of events that worsen inflation
and deflationary spiral are chain of events that worsen deflation.
Fig 1: Deflationary spiral
When a debtor borrows an amount and repays it later. The amount has lost
its value due to inflation. Hence the borrowed Rs 100 in 2010 and repaid
in 2015 have different value. In 2010 the purchasing power of Rs 100 was
higher than in 2015. Hence, Inflation favor debtor than creditor.
Phillip's Curve: Inflation is inverse relation to unemployment.
Stagflation: Economic situation where both inflation and
CPI for Workers: Labor bureau in Chandigarh / Shimla
It compiles the CPI for industrial workers, rural workers and agriculture
workers at All India levels. Base year for industrial workers CPI is 2001,
rural and agriculture workers CPI is 1986-87.
Global Risks Report by World Economic Forum. Top 10
risks in terms of likelihood and impact and also categorize risks as per
environment, geopolitical, societal, economic and technological.
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