What are the most essential causes of inflation? When aggregate demand for goods and services exceeds aggregate supply of output which is produced by fully employment the given resources of an economy, excess demand is said to occur.
When aggregate demand for goods and services exceeds aggregate supply of output which is produced by fully employing the given resources of an economy, excess demand is said to occur.
There is hardly a thing or commodity whose price has not gone up in the recent times. Rise in prices has become a common feature in India and the people are reconciled to this fact. Rise in prices is called inflation.
The phenomenon is not to be equated with the fact of high prices. It is a phenomenon of rising prices. It is a continuous fall in the purchasing power of money in absolute terms.
A cost-push inflation is the one in which price rise is initiated and sustained by increasing prices of inputs or similar other causes. In economic theory, an increase in money rates is mentioned as the main reason of an increase in production costs.
The beneficial effects of inflation are limited to only its initial phase when the price rise is sufficiently mild. During that period, there is a favorable impact upon both output and employment. The increase in prices and distributive inequalities are more than counterbalanced by gains in output and employment.
The ill effects of inflation, particularly in its later stages, are so widespread and damaging for the economy and society that there is a general agreement on the need to check its progress.
It is not possible to specify any particular cause or causes of inflation. For this reason, there has never been a general agreement on the causes of inflation. The fact is that a market economy is subject to an unending process of adjustment, and any particular price adjustment may start an inflationary process.
Inflation is essentially an economic phenomenon as it originates in the economic system and is the result of action and interaction of economic forces. It is always accompanied by a rise in the price level. It is a process of uninterrupted increase in prices.
For a layman, inflation means a substantial and rapid increase in the general price level which causes a decline in the purchasing power of money. Inflation is statistically measured in terms of percentage increase in the price index per unit of tune (usually a year or a month).