For instance, an overall increase in excise tax of mass consumption goods is definitely inflationary. Keynes considers this type of inflation as the true inflation. Under open inflation, market mechanism performs the function of allocating scarce resources among competing industries. Essay on Inflation:- 1. The monetarist theory can be studied with respect to static and dynamic conditions: (i) In a static economy, with a given level of output, according to the equation of exchange- MV = PT, increases in the supply of money (M) alone are responsible for increases in the price level (P), assuming the velocity of money (V) constant; P increases in the same proportion as M increases. Before uploading and sharing your knowledge on this site, please read the following pages: 1. If inflation is anticipated, people can adjust with the new situation and costs of inflation to the society will be smaller. The theoretical basis of the relationship between inflation and development is provided by the two systems of economic thought: 1. Monetarists’ argument that “only money matters” is based on the assumption that at or near full employment, excessive money supply will increase aggregate demand and will thus cause inflation. Thus, an increase in aggregate demand at the full employment stage leads to an increase in price level only, rather than the level of output. That is why monetrarists argue that inflation is always and everywhere a monetary phenomenon. This is demand-pull inflation. Inflation and unemployment are the two most talked-about words in the contemporary society. Thus, there is no strict relationship between prices and output. If the consumption spending is countered by the government via price control and rationing device, the inflationary situation may be called a suppressed one. Rather, the loan- giving institution makes adequate safeguard against the erosion of real value. People’s desires are inconsistent. Symbolically, p = w – x. Cost-push inflation also occurs when the monopoly power of the businesses enables them to raise prices to increase their profits. Because of ant-inflationary policies pursued by the government, inflation may not be an embarrassing one. Further shift in the AS curve to AS2 results in higher price level (OP3) and a lower volume of aggregate output (OY3). A fall in savings means a lower rate of capital formation. As we know that there is something called deflation which is the opposite meaning of inflation. Cost-push inflation. Such inflation is called demand-pull inflation (henceforth DPI).
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