201408 Semester I MB0042 Managerial Eco
Q.No 1- Inflation is a global Phenomenon which is associated with high price causes decline in the value for money. It exists when the amount of money in the country is in excess of the physical volume of goods and services. Explain the reasons for this monetary phenomenon.
Inflation is commonly understood as a situation of substantial and rapid increase in the level of prices and consequent deterioration in the value of money over period of time. It refers to the advantage rise in the general level of prices and fall in the value of money. Inflation is upward movement in the average level of prices.
Cause of Inflation
1. Demand Side increase in aggregative effective demand is responsible for inflation. In this case, aggregate demand exceeds aggregate supply of goods and services. Demand rises much faster than supply. We can enumerate the following reasons for increase in effective demand.
Increase in money supply
Increase in disposable income
Increase in private consumption expenditure & investment
Increase in exports
Existence of black money
Increase in foreign exchange reserves
Increase in population growth
High rates
Reduction in the rates of direct taxes
Reduction in the level of savings
2. Supply Side Generally, the supply of goods and services don’t keep pace with the ever increasing demand for goods and services. Thus, supply does not match the demand. Supply falls short of demand. Increase in supply of goods and services may be limited because of the following reasons.
Shortage in the supply of factors of production
Operation of law of diminishing returns
Hoardings by traders and speculators
Hoardings by consumers
Role of trade unions
Role of natural calamities
War
International factors
Increase in prices of inputs within country
3. Role of Expectations Expectations also play a significant role in accentuating inflation. The following points are worth mentioning.
If people expect further rise in prices, the current aggregate demand increases, which in
Inflation is commonly understood as a situation of substantial and rapid increase in the level of prices and consequent deterioration in the value of money over period of time. It refers to the advantage rise in the general level of prices and fall in the value of money. Inflation is upward movement in the average level of prices.
Cause of Inflation
1. Demand Side increase in aggregative effective demand is responsible for inflation. In this case, aggregate demand exceeds aggregate supply of goods and services. Demand rises much faster than supply. We can enumerate the following reasons for increase in effective demand.
Increase in money supply
Increase in disposable income
Increase in private consumption expenditure & investment
Increase in exports
Existence of black money
Increase in foreign exchange reserves
Increase in population growth
High rates
Reduction in the rates of direct taxes
Reduction in the level of savings
2. Supply Side Generally, the supply of goods and services don’t keep pace with the ever increasing demand for goods and services. Thus, supply does not match the demand. Supply falls short of demand. Increase in supply of goods and services may be limited because of the following reasons.
Shortage in the supply of factors of production
Operation of law of diminishing returns
Hoardings by traders and speculators
Hoardings by consumers
Role of trade unions
Role of natural calamities
War
International factors
Increase in prices of inputs within country
3. Role of Expectations Expectations also play a significant role in accentuating inflation. The following points are worth mentioning.
If people expect further rise in prices, the current aggregate demand increases, which in