DEFINE INFLATION. EXPLAIN VARIOUS CAUSES FOR INFLATION IN PAKISTAN
(a) DEMAND SIDE (b) SUPPLY SIDE
Moderate inflation is associated with economic growth, while high inflation can signal an overheated economy. As an economy grows, business and consumers spend more money on goods and services. In the growth stage of an economic cycle, demand typically outstrips the supply of goods, and producers can raise their prices. As a result, the rate of inflation increases. If economic growth accelerates very rapidly, demand grows even faster and producers raise prices continually. An upward price spiral, sometimes called “runway inflation” or “hyperinflation”, can result.
The inflation syndrome is sometimes described as “too many dollars chasing too few goods:” in other words, as spending outpaces the production of goods and services, the supply of dollars in an economy exceeds the amount needed for financial transactions. The result is that the purchasing power of a dollar declines.
In general, when economic growth begins to slow, demand eases and the supply of goods relative to demand. At this point, the rate of inflation usually drops. Such a period of falling is known as disinflation.
True inflation begins when the elasticity of supply of output in response to increase in money supply has fallen to zero or when output is unresponsive to changes in money supply. When there exists a state of full unemployment, the conditions will be clearly inflationary, if there is increase in supply of money. But we don’t subscribe to the classical view that when there is full employment we can say that money supply increases it results partly in the increase of output (GNP) and it partly feeds the rise in prices and when the supply of output lags far behind, the rise in prices is described as “inflation”.
Some of the definitions of “inflation” are: