Answer:
Explanation:
Inflation is often defined in terms of its supposed causes. Inflation exists when money supply exceeds available goods and services. Or inflation is attributed to budget deficit financing. A deficit budget may be financed by additional money creation. But the situation of monetary expansion or budget deficit may not cause price level to rise. Hence the difficulty of defining ‘inflation’.
Inflation may be defined as ‘a sustained upward trend in the general level of prices’ and not the price of only one or two goods. G. Ackley defined inflation as ‘a persistent and appreciable rise in the general level or average of prices’. In other words, inflation is a state of rising price level, but not rise in the price level. It is not high prices but rising prices that constitute inflation.
Inflation may be caused by a variety of factors. Its intensity or pace may be different at different times. It may also be classified in accordance with the reactions of the government toward inflation.
Thus, one may observe different types of inflation in the contemporary society:
i. Currency Inflation
ii. Credit Inflation
iii. Deficit-Induced Inflation
iv. Demand-Pull Inflation
v. Cost-Push Inflation
Inflation is mainly caused by excess demand/or decline in aggregate supply or output. Former leads to a rightward shift of aggregate demand curve while the latter causes aggregate supply curve to shift leftward. Former is called demand-pull inflation (DPI) and the latter is called cost- push inflation (CPI).
