Question

What is inflation? Elucidate the causes and consequences of
महंगाई क्या है? मुद्रास्फीति के कारणों और परिणामों की व्याखाको​

Answer 1

Answer:

friction is a force

Explanation:

when two surfaces rub against it self is called friction

Answer 2

Inflation means there is a sustained increase in the price level. The main causes of inflation are either excess aggregate demand (economic growth too fast) or cost push factors (supply-side factors).

causes-of-inflation

Summary of Main causes of inflation

1-Demand-pull inflation – aggregate demand growing faster than aggregate supply (growth too rapid)

2-Cost-push inflation – For example, higher oil prices feeding through into higher costs.

3-Devaluation – increasing cost of imported goods, and also the boost to domestic demand.

4-Rising wages – higher wages increase firms costs and increase consumers’ disposable income to spend more.

Expectations of inflation – causes workers to demand wage increases and firms to push up prices.

1. Demand-pull inflation-

If the economy is at or close to full employment, then an increase in aggregate demand (AD) leads to an increase in the price level (PL). As firms reach full capacity, they respond by putting up prices leading to inflation. Also, near full employment with labour shortages, workers can get higher wages which increase their spending power.

increase-ad-inflation-growth-for-PC

AD can increase due to an increase in any of its components C+I+G+X-M

We tend to get demand-pull inflation if economic growth is above the long-run trend rate of growth. The long-run trend rate of economic growth is the average sustainable rate of growth and is determined by the growth in productivity

2. Cost-push inflation-

If there is an increase in the costs of firms, then businesses will pass this on to consumers. There will be a shift to the left in the AS.

SRAS-shift-left

Cost-push inflation can be caused by many factors

1. Rising wages

If trades unions can present a united front then they can bargain for higher wages. Rising wages are a key cause of cost-push inflation because wages are the most significant cost for many firms. (higher wages may also contribute to rising demand)

2. Import prices

One-third of all goods are imported in the UK. If there is a devaluation, then import prices will become more expensive leading to an increase in inflation. A devaluation/depreciation means the Pound is worth less. Therefore we have to pay more to buy the same imported goods.

3. Raw material prices

The best example is the price of oil. If the oil price increase by 20% then this will have a significant impact on most goods in the economy and this will lead to cost a push inflation. E.g., in 1974 there was a spike in the price of oil causing a period of high inflation around the world

4. Profit push inflation

When firms push up prices to get higher rates of inflation. This is more likely to occur during strong economic growth.

5. Declining productivity

If firms become less productive and allow costs to rise, this invariably leads to higher prices.

6. Higher taxes

If the government put up taxes, such as VAT and Excise duty, this will lead to higher prices, and therefore CPI will increase. However, these tax rises are likely to be one-off increases. There is even a measure of inflation (CPI-CT) which ignores the effect of temporary tax rises/decreases.