Economics [4 marks Question-Answer]

A. When prices rise at a mild rate like that of snail or creeper (around 2% per annum) it is known as creeping inflation.
B. Causes of Demand Pull Inflation. Demand pull inflation is mainly caused by the following factors :
(i) Increase in Money Supply : The first major cause of demand pull inflation is increase in the supply of money which leads to increase in aggregate demand. Supply of money includes currency with the public and demand deposits at banks. This is money in spendable form. Demand deposits at banks can be withdrawn at any time and hence act as medium of exchange.
(ii) Increase in Disposable Income : When the disposable income of the people increases it raises their demand for goods and services leading to demand pull inflation.
(iii) Increase in Population : Increase in population is another major cause responsible for rise in prices. Increase in population means increased demand for consumer goods. It increases the aggregate demand for goods and services and puts pressure on the existing supply of goods and services.
(iv) Increase in Export Demand : Expansion in foreign demand as a result increase in exports will raise the incomes of poor people. This will push up demand for goods and services within the country.

(v) High Rate of Investment : The heavy investments made by the government as well as private industrialists have resulted in continuous increase in the prices of capital goods and other items of production.

A. Prices instead of being pulled up by demand factors (i.e., excess demand) may also be pushed up as a result of rise in the cost of production. Inflation caused by cost factors is called cost push inflation. The push forces operate through cost factors such as wages, profits or material costs. So the true source of inflation is the cost of production.
This type of inflation emerges due to increase in the costs.
B. Causes of Cost Push Inflation. The cost push inflation is caused by the following factors:
(i) Rise in Wages : Rise in wages has been considered as the main determinant of cost push inflation. This is because in modern times, workers have organised themselves into strong trade unions which have succeeded in getting higher wages for their members.
(ii) Increase in the Price of Basic Materials : Cost push inflation is also caused by increase in the prices of some basic materials, such as steel, basic chemicals, oil, etc. Since, these materials are used directly or indirectly in almost all the industries, any increase in their prices affect the whole of the economy and the prices everywhere tend to increase.
(iii) Higher Taxes : Another important cause of cost push inflation is the imposition of higher taxes on commodities, like excise duties, sales tax etc. These taxes are largely passed over by the producers to the consumers by the amount of taxes.
(iv) Oil Price Hike and Global Inflation : Global inflation and hike in oil prices has resulted in higher impact of crude oil from abroad. It results in rise in prices of diesel, petrol and other petroleum products in India.
(v) Administrative Price : Administrative price refers to price fixed by government for essential goods. Price level in the country has also increased due to frequent hike in the administered prices like railway flights, port charges coal, steel, and goods produced by public sector industries.

A moderate rise in prices (i.e., creeping inflation) has a favourable effect on production, particularly when there are under-employed resources in the country. Rising prices increase the profit expectations within the business community. But a state of running or hyper inflation creates uncertainty in the economy and proves very harmful to production.
The evil effects of inflation are stated below.
(i) Misallocation of Resources : Inflation results in maladjustments in production. Producers divert their resources from the production of essential commodities to non-essential goods (i.e., luxury goods) from which they expect higher profits.
(ii) Reduction in Saving : Inflation adversely affects savings. When prices rise rapidly, more money is now needed to buy the same amount of goods and services than before. It, thus, reduces saving and hence investment. As a result, production is adversely affected.
(iii) Discourages Foreign Capital : Inflation discourages the inflow of foreign capital into the country. Foreigners do not like to invest in those countries where prices are rising. Rising costs of raw materials and other inputs make the foreign investment less profitable.
(iv) Hoarding : During inflation, the hoarding of larger stocks of goods becomes profitable. As a result of this, the available supply of goods in relation to increasing monetary demand decreases. This results in black-marketing. The producers then sell their goods in the black-market which increases inflationary pressures.
(v) Fall in Quality : Inflation tends to create a sellers' market. Sellers have now got the command on prices because of excessive demand in the market. Anything can be sold in such a market. Therefore, sellers do not bother much about the quality of goods produced by them; instead they concentrate more on earning high profits.

Inflation refers to a state of rise in the general price level.
Wage and Salaried Class or Fixed Income Group : Fixed income group (which include wage and salary earners, pensioners) suffer during inflation. It is due to the reason that wages and salaries do not increase in the same proportion in which the prices or the cost of living rises. But those workers and employees who have formed strong trade unions stand to lose less in comparison to those who are not organised. Due to inflation, purchasing power of money falls. As a result of it, fixed income earners tend to buy less amount of goods and services than before even when there is a little rise in their wages.

Demand pull inflation refers to a situation in which prices rise because the demand for goods and services exceeds their total supply available at current prices. It is also known as 'excess demand inflation'. Excess demand means aggregate real demand for output in excess of maximum possible output or full employment output at the current price level. Thus, demand pull inflation may be defined as a situation where the aggregate demand exceeds the economy's ability to supply the goods and services at the current prices, so that the prices are pulled up by the excess demand. That is why it is called demand pull inflation.
Causes of Demand Pull Inflation. Demand pull inflation is mainly caused by the following factors :
(i) Increase in Money Supply : The first major cause of demand pull inflation is increase in the supply of money which leads to increase in aggregate demand. Supply of money includes currency with the public and demand deposits at banks. This is money in spendable form. Demand deposits at banks can be withdrawn at any time and hence act as medium of exchange.
(ii) Increase in Disposable Income : When the disposable income of the people increases it raises their demand for goods and services leading to demand pull inflation.
(iii) Increase in Population : Increase in population is another major cause responsible for rise in prices. Increase in population means increased demand for consumer goods. It increases the aggregate demand for goods and services and puts pressure on the existing supply of goods and services.
(iv) Increase in Export Demand : Expansion in foreign demand as a result increase in exports will raise the incomes of poor people. This will push up demand for goods and services within the country.

(v) High Rate of Investment : The heavy investments made by the government as well as private industrialists have resulted in continuous increase in the prices of capital goods and other items of production.

(i) Inflation refers to a state of rise in the general price level.
Debtors and Creditors : During inflation debtors gain but the creditors lose. When prices rise, the value of money (i.e., purchasing power of money) falls. The debtors gain because they now pay less in terms of goods and services. The purchasing power of money was high when they had borrowed but low at the time of return. Thus, the burden of the debt is reduced. On the other hand, creditors stand to lose. Although they get back the same amount of money which they lent, they get less in terms of goods and services. Thus, there is a transfer of wealth from creditors to debtors.
(ii) 1. Creeping inflation : When the rise in prices is very slow like that of a snail or creeper, it is called creeping inflation. In terms of speed, prices rise in the range of 1% to 3% annually which is regarded safe and essential for economic growth. Creeping inflation in the first stage of inflation.
2. Walking inflation : When prices rise moderately and the annual inflation rate is in single digit, it is called walking or trotting inflation. In other words, the rate of rise in prices is in the intermediate range of 3 to 6 per cent per annum or less than 10 per cent. Walking inflation is a warning signal for the government to control it before it turns into running inflation. Such inflation can be harmful to the economy. Consumers start stocking goods fearing the prices will rise further.

(a) Fixed Income Groups : Fixed income earners (i.e., wage and salary earners, pensioners etc.) suffer during inflation. It is because that their incomes do not increase in the same proportion in which prices or the cost of living rises. As a result, these fixed income earners tend to buy less amount of goods and services than before even when there is little rise in their income.
(b) Producers : Producers tend to gain during inflation. It is because that prices of their inventories (stock of goods and raw-material) go up. Prices rise at a faster rate than the cost of production. Producers get better prices for their goods during inflation.

Inflation refers to a state of rise in the general price level.
Causes of Demand Pull Inflation. Demand pull inflation is mainly caused by the following factors :
(i) Increase in Money Supply : The first major cause of demand pull inflation is increase in the supply of money which leads to increase in aggregate demand. Supply of money includes currency with the public and demand deposits at banks. This is money in spendable form. Demand deposits at banks can be withdrawn at any time and hence act as medium of exchange.
(ii) Increase in Disposable Income : When the disposable income of the people increases it raises their demand for goods and services leading to demand pull inflation.
(iii) Increase in Population : Increase in population is another major cause responsible for rise in prices. Increase in population means increased demand for consumer goods. It increases the aggregate demand for goods and services and puts pressure on the existing supply of goods and services.
(iv) Increase in Export Demand : Expansion in foreign demand as a result increase in exports will raise the incomes of poor people. This will push up demand for goods and services within the country.

(v) High Rate of Investment : The heavy investments made by the government as well as private industrialists have resulted in continuous increase in the prices of capital goods and other items of production.

Causes of Cost Push Inflation. The cost push inflation is caused by the following factors:
(i) Rise in Wages : Rise in wages has been considered as the main determinant of cost push inflation. This is because in modern times, workers have organised themselves into strong trade unions which have succeeded in getting higher wages for their members.
(ii) Increase in the Price of Basic Materials : Cost push inflation is also caused by increase in the prices of some basic materials, such as steel, basic chemicals, oil, etc. Since, these materials are used directly or indirectly in almost all the industries, any increase in their prices affect the whole of the economy and the prices everywhere tend to increase.
(iii) Higher Taxes : Another important cause of cost push inflation is the imposition of higher taxes on commodities, like excise duties, sales tax etc. These taxes are largely passed over by the producers to the consumers by the amount of taxes.
(iv) Oil Price Hike and Global Inflation : Global inflation and hike in oil prices has resulted in higher impact of crude oil from abroad. It results in rise in prices of diesel, petrol and other petroleum products in India.
(v) Administrative Price : Administrative price refers to price fixed by government for essential goods. Price level in the country has also increased due to frequent hike in the administered prices like railway flights, port charges coal, steel, and goods produced by public sector industries.
The effect of inflation on investors : Inflation has a mixed effect on the investors. Investors in fixed interest earning assets (like bonds, debentures and deposits) are the losers, whereas investors in shares of the companies tend to gain during inflation. Small investors who invest their money in bonds, debentures and deposits with the commercial banks tend to lose because they receive only a fixed interest income from such investment. On the other hand, investors in shares tend to benefit because they get more dividend on account of high profits made by joint stock companies during inflation.

Prices instead of being pulled up by demand factors (i.e., excess demand) may also be pushed up as a result of rise in the cost of production. Inflation caused by cost factors is called cost push inflation. The push forces operate through cost factors such as wages, profits or material costs. So the true source of inflation is the cost of production.
This type of inflation emerges due to increase in the costs.
Causes of Cost Push Inflation. The cost push inflation is caused by the following factors:
(i) Rise in Wages : Rise in wages has been considered as the main determinant of cost push inflation. This is because in modern times, workers have organised themselves into strong trade unions which have succeeded in getting higher wages for their members.
(ii) Increase in the Price of Basic Materials : Cost push inflation is also caused by increase in the prices of some basic materials, such as steel, basic chemicals, oil, etc. Since, these materials are used directly or indirectly in almost all the industries, any increase in their prices affect the whole of the economy and the prices everywhere tend to increase.
(iii) Higher Taxes : Another important cause of cost push inflation is the imposition of higher taxes on commodities, like excise duties, sales tax etc. These taxes are largely passed over by the producers to the consumers by the amount of taxes.
(iv) Oil Price Hike and Global Inflation : Global inflation and hike in oil prices has resulted in higher impact of crude oil from abroad. It results in rise in prices of diesel, petrol and other petroleum products in India.
(v) Administrative Price : Administrative price refers to price fixed by government for essential goods. Price level in the country has also increased due to frequent hike in the administered prices like railway flights, port charges coal, steel, and goods produced by public sector industries.

Inflation refers to a situation in which prices of goods and services rise persistently at a fast pace. Effects of Inflation
(i) Fixed Income Groups : Fixed income earners (i.e., wage and salary earners, pensioners etc.) suffer during inflation. It is because that their incomes do not increase in the same proportion in which prices or the cost of living rises. As a result, these fixed income earners tend to buy less amount of goods and services than before even when there is little rise in their income.
(ii) Producers : Producers tend to gain during inflation. It is because that prices of their inventories (stock of goods and raw-material) go up. Prices rise at a faster rate than the cost of production. Producers get better prices for their goods during inflation.
(iii) Distribution of Income : Inflation redistributes income because price of ail factors do not rise in the same proportion. Prices rise faster but incomes do not. There is an inequality in distribution of income and wealth. During inflation, producers and traders are the gainers. Prices of their inventories (stock of goods and raw-material) go up and thereby increasing their profit. Prices rise faster than the cost of production. On the other hand, fixed income groups suffer during inflation because their incomes do not keep pace with the rising prices. As a result, rich gets richer and poor gets poorer.