Economic Infolation: Causes And Types Of Inflation

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Inflation is the pervasive and sustained rise in the aggregate level of prices measured by an index of the cost of various goods and services. Repetitive price increases erode the purchasing power of money and other financial assets with fixed values, creating serious economic distortions and uncertainty. Inflation results when actual economic pressures and anticipation of future developments cause the demand for goods and services to exceed the supply available at existing prices or when available output is restricted by faltering productivity and marketplace constraints. Sustained price increases were historically directly linked to wars, poor harvests, political upheavals, or other unique events.

(1) Demand-Pull Inflation:
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If the price increase persists inflation occurs.
(3) Open – Inflation: This is a type of inflation generated by an increase in money supply without a corresponding increase in the volume of goods and services, therefore, too much money chases fewer goods resulting in a rise of the general price level. This could be brought about by excessive bank lending or over-expansion of currency by the Central Bank.

The major causes of inflation widely identified include:
i. Excessive deficit-financing and rapidly increasing government expenditure. ii. Excessive bank lending ii. Increase in wages and salaries of workers. iii. There is low domestic productivity in both the industrial and agricultural sectors. iv. Poor storage facilities of agricultural products.
v. Population
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The use of a Monetary Policy:
The use of monetary policy tried to control the availability and use of credit. This type of policy is used by the Central bank to reduce lending by commercial banks. Thereby reducing the amount of money in circulation.

A monetary policy reduces the supply of money involves the use of open market operations (OMO). Increasing the cash-deposit ratio, the use of special deposits, use of directives, moral Suasion and funding.

2. The use of a Fiscal Policy:
A fiscal policy involves the use of government tax (or income) and expenditure policies to regulate the economy. It includes:
i. Tax Policy: The government could increase taxes on income. This reduces the disposable income of people. Consequently, there will be a reduction in their demand for goods and services. ii. In order to control inflation, the government could increase its borrowing from the Public and at the same time spend less of its revenue. This could be done by issuing government securities like bonds, stocks and treasury

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