Inflation:
In general, continuous rise in price level is known as inflation. Inflation is a situation when demand for goods and services has become greater than their supply.
Types of Inflation:
There are two types of Inflation;
1) Demand Pull Inflation
2) Cost Push Inflation
1) Demand Pull Inflation:
When demand for goods and services increases than their supply, price increases at a rapid rate and such rise in price is termed as demand pull inflation.
2) Cost Push Inflation:
When production cost if goods and services increases prices also show an upward trend and such an increase in prices is known as cost push inflation.
Causes of Inflation:
There are many causes of Inflation and their detail is given below;
1) Deficit Financing:
Deficit Financing is the major cause of Inflation. A large part of development expenditure is done with the help of deficit financing while production had not been increased at the same rate. Thus the result is inflation.
2) Increase in Cost of Production:
The increase in cost of production also leads to inflation because cost of production is included in prices.
3) Government Development Expenditure:
Government development expenditures are the major cause of Inflation because when huge amount of development expenditures are made aggregate demand will Increase more than aggregate supply, which creates inflation.
4) Devaluation:
It means decrease in the value of local currency as compared to foreign currency. The devaluation of the currency also leads to inflation. Effects of Inflation
5) Political Instability:
As country's economy depends upon political stability. Political Instability discourages investment. Industrialists cannot make good plans to increase production as a result price level increases.
6) Hoardings:
Another big cause of Inflation is hoarding of goods. Because of huge amount of goods being hoarded creates shortage of goods and price increases.
7) Population:
An increase in population also causes inflation. As population increases rapidly but supply of goods do not increases at the same rate which increases the price level.
8) Decline in Production:
Sometimes production decreases due to shortage of resources. As a result production level declines and owing to this prices increases and inflation is created.
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