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MONEY AND INFLATION — Economics STD 12 Commerce — Question

Gujarat BoardEnglish MediumSTD 12 CommerceEconomicsMONEY AND INFLATION5 Marks
Question
What is Inflation? Explain the characteristics of Inflation.
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Answer

$1.$ Introduction:
  • After the second world war most of the countries in the world were facing the situation of inflation.
  • In our country the problem of inflation is a matter of tense.
  • Inflation is an economic problem.
  • Increases in price-level is inflation. But it is difficult to give exact definition of inflation.
  • In simple sense, inflation is defined as a sustained or persistent rise in aggregate price level.
$2.$ Meaning of Inflation $($Definition$):$
  • Inflation is an economic problem.
  • A sustained or persistent rise in aggregate price level is termed as inflation.
  • During inflation there is decrease in the purchasing power of money.
  • Many economist have given various definitions about the inflation which are as under:
  • According to Dr. A.P. Lerner, "A situation of excess demand over supply of goods is called inflation".
  • According to Dr. A.C. Pigou, "Inflation is said to occur when monetary income rises faster than real income".
  • According to Dr. I.M. Keynes, "The real situation of inflation is created with increase in money income beyond the level of the full employment of factory of production".
  • According to Prof. Milton Friedman, "Inflation is a universal monetary phenomenon. When an economy faces the increase in supply of money, it cannot digest, it result in price-rise."
  • According to Prof. Crowther, "Inflation is such a condition in which there is rapid and remarkable increase in price-rise but decrease in value of money".
$3.$ Characteristics of Inflation:
  • Various characteristics of inflation can be taken out from different definitions:
$(1)$ Inflation is not just price rise but it is sustained or persistent rise in aggregate price level.
  • Due to seasonal or casual reasons there will be shortage of goods and prices go high but that is not called inflation because as time passes this price rise situation gets normal.
  • E.g. high price of cold drink during summer season that is not called inflation.
$(2)$ In an economy when there is price rise in all sectors means prices of all commodities increases.
  • This type of inflation is called excessive inflation.
$(3)$ During inflation the purchasing power is decreased.
$(4)$ During employment situation when sudden price rise is there that is pure inflation.
$(5)$ Generally inflation is one of the financial events because inflation generally occurs as there is high money supply in an economy.
To know the concept of inflation following matter should be taken into consideration:
$(1)$ When government keeps control over and suppresses price and rationing to control the rise in
price. It is called 'Suppressed Inflation'.
$(2)$ For improvement in the quality of product if price there is an increase in the price of product than it is not inflation.
$(3)$ For shorter period of time in economy the price of limited goods or services, is increase then it is not inflation.
$(4)$ An economy is suffering from the situation of deflation and prices keep on increasing that is not called inflation because this situation is arised for certain period.
$(5)$ If there is unemployment in factors of production leads an economy the increasing price of goods or services will allow employment to increase production to decrease the price of goods and service.
Therefore, the increase in price levels in all sectors of an economy even after fall in employment is considered inflation and it proves to be harmful for economy.

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