Note 5- Inflation

Inflation is the sustained rise in the price levels of products or services produced in an economy that is an objective of an economy.
There are two types of inflation: Demand-pull inflation and cost-push inflation. They may lead to
1)a fall in the value of money
2)menu cost
3)shoeleather cost
4)administrative cost
5)inflationary noise.
6)loss of international competitiveness
7)random redistribution of income
8)uncertainty

1.Demand-pull inflation is caused by an increasing demand but insufficient supply.Therefore,the causes can be:
1)A cut in exchange rates: Then,the price of import goods will increase which lead to less import. Consequently,people have to buy more domestic goods to satisfy themselves.
2)A cut in taxation: People have more disposable income which can be spent and the demand will rise.
3) A cut in interest rate: This will encourage people to consume more rather than saving.

if we want to reduce the inflation,we can also use the fiscal and monetary policy:
1) Increasing interest rate to reduce the consumption and demand.
2) Increasing taxation on the products and people will consume and demand less.

2. Supply-cost inflation is caused by an increasing costs of supply:
Short run:
1) Wage of labour increases.
2) Increase in the raw materials.
3) Higher indirect tax imposed on some goods like exercise duty.
Long run:
e1)The economy is almost at full capacity and it's dificult to find suitable people.

We can use supply-side policy to promote the supply:
1)Education and training to incease the productivity.
2) Reducing the power of Trade Union.
3)Increasing exchange rates to reduce the burden on domestic goods and increase the competitiveness.

The inflation rate is targeted to be 2%.