Inflation
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Measurement and Definition

Inflation is a rise in prices.

Causes of Inflation

Rise in Costs

-          General

o        Demand Pull

o        Cost Push

-          Wages

o        Unions

Excess supply of Money

-          MV = PT

o        M= Supply of Money

o        V= Velocity of Money

o        P= Average price of transaction

o        T= Average number of transactions

o        V and T are fixed – therefore a rise in M will cause an increase in M

Costs of Inflation

-          Loss of international competitiveness

-          Inflation depreciation spiral

-          Loss of information, as firms are unable to discern rise in demand from inflation

-          Loss of savings, financial collapse

-          MENU COSTS

-          REDISTRIBUTION

-          UNCERTAINTY AND LACK OF INVESTMENT

-          BALANCE OF PAYMENTS

-          Income and Subsitution Effects

-           

Measures to deal with Inflation

Supply-Side

Demand-Side

- Monetary

- Fiscal

Other Notes in this Category

1. Formulae
2. Inflation
3. Monetarism and Keynsianism
4. Resource Allocation in the Market
5. The Concept of Price

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