B.Com Ist Year Inflation Long Short Question Answer Notes
(Bareilly, 2014) The condition of inflation arises when monetary income ipeteases more rapidly in comparison to increase in production of goods and services. Thus, causes of inflation can be studied in two parts:
(1) Factors which increase monetary income.
(2) Factors which reduce the production,
Factors which Increase Monetary Income : Quantity of money in the country can be increased due to following reasons:
Money and Credit Policy of Central Bank : When government need financial resources for the implementation of their development programmes, then it issue new currency into lation. This increases monetary income and creates tionary situations in the economy. Liberal credit policy of Fal Bank also create inflationary conditions in the country.
(2) Policy of Deficit Financing: When government finance sess expenditure with the help of issue of new currency, it is own as deficit financing. New currency in circulation increase the monetary income which creates inflationary situation in the country.
(3) Increase in Velocity of Money : Due to increase in pensity to consume, the velocity of money increases. It has the same effect as issue of new currency. Thus monetary income of the people increases, which give rise to inflation.
(4) Credit Policy of Banks: When commercial banks create more credit by reducing their cash reserve ratio, then quantity of money in the circulation increases which further results in inflation in the economy.
(5) Increase in Unproductive Expenditure: Unproductive expenditure such as war and internal protection, natural calamities, floods, droughts etc. also increase money in circulation without any increase in the supply of goods. It creates inflationary situations in the economy.
(6) Increase in Black Money : Black money increases the demand of goods and services and thus creates inflation in the economy.
(7) Gap between Investment and Production : In the planned economy huge amounts are invested for the establishment of capital goods industries. But this huge investment takes time to increase the production and as a result there becomes gap between investment and production. It give rise to inflation in the economy.
FACTORS WHICH REDUCE THE PRODUCTION STUDY NOTES
Without any increase in monetary income, reduction in the production of goods and services also creates inflation in the economy. The main factors responsible for decrease in production
are as follows:
- Natural Calamities : Natural Calamities : Natural calamities like floods, s, tamine, earthquake and discuses of crops reduces the Supply of goods. Due to these calamities the agriculture and industrial production declines which give rise to inflationary situations.
(2) Industrial Disputes: Lockouts, strikes and other dispute in the industrial units affects the production adversely. This reduces the supply of goods which creates inflation in the economy.
(3) Commercial Policy of the Government : When government adopt such type of commercial policy which encourages exports and put banned on imports then there becomes scarcity of goods in the country which give rise to inflationary situations.
(4) Tax Policy of the Government: When government raise the tax rates or imposed new taxes, then prices of goods and services start rising. This affects the demand of goods and services adversely and due to this production starts declining.
(5) Industrial Policy : Strict restrictions imposed on the establishment of new industrial units discourages new investments. Such type of policy reduces the production of goods in the country.
(6) Shortage of Raw Material : Shortage of raw material, affects the production of goods adversely. This reduces the supply of goods and therefore prices of the goods began to rise.
(7) Applicability of Law of Diminishing Return: If the law of diminishing return is being applicable in the production, then it increases the per unit cost of production. It further increases the price of goods which give rise to inflationary situations.
(8) Tendency of Hoarding: When traders and businessmen start hoarding of goods to make more profits, then prices of goods starts rising which in turn lead to rise in general price level.
EFFORTS MADE BY THE GOVERNMENT TO CHECK INFLATION STUDY NOTES
The following measures are taken to control inflation;
Monetary Measures to Control Inflation : Monetary measures are applied to check the supply of currency and credit in the circulation.
(i) Control on Credit : To control inflation in the economy, credit control is necessary. The central bank should also make use of its weapons : bank rate, open market operations and variable reserve ratio etc. to control credit. These reduces the money supply in the economy and thus proves helpful to control inflation.
(ii) Strict Note Issue Policy: For issuing new currency, the gold or foreign exchange reserve must be enhanced. This will make the new currency issue system difficult which could check inflation.
(iii) Reduction in Money Supply : The central bank cau convert old money into new currency at low rate to reduce money supply in the circulation. It can also withdraw old money from circulation to check inflation.
Fiscal Measures to Check Inflation :
It includes the measures taken by the government with regard to taxation, expenditure and public borrowings.
(i) Increase in Taxes : The problem during inflation is to reduce the size of disposable income in the hands of the general public in view of the limited supply of goods and services in the market. It is, therefore, necessary to take away the excess purchasing power from the public in the form of taxes, The rates of existing taxes should be steeply increased, while new taxes should be imposed on commodities so as to leave less money supply with the public to spend.
(ii) Increase in Public Debts: To limit the purchasing power of public, the government can make more borrowings from the public. This will reduce the demand of goods and services and consequently lead to fall in prices.
(iii) Reduction in Government Expenditure : To control inflation government expenditure must be reduced. Reduced expenditure brings down the aggregate demand and this can control inflation. By reducing the non-developmental expenditure of the government, inflation can be controlled.
(iv) Control Over Investment : To control inflation, the government should check over investment which do not produce consumer goods and whose production starts after a long time.
(v) Overvaluation of Money: An overvaluation of domestic currency in terms of foreign currencies will also serve as an anti-inflationary measure. Firstly, it will discourage exports and thereby increase the availability of goods in the domestie market, Secondly, by encouraging imports from abroad, it will add to the domestic supply of goods in the economy. But overvaluation as an anti-inflationary weapon suffers from several limitations.
(vi) A Suitable Income Policy : At a time of inflation, the government must also adopt a suitable price-income policy. It should strictly control wages, salaries and profits to keep spending at a low level to fight inflation.
(vii) Policy of Balanced Budget: The government should make balanced budget during inflation period.
Table of Contents
OTHER MEASURES STUDY NOTES
- Price Control and Rationing : The government should follow the policy of price control and rationing to control inflation
Government setup the upper limit beyond which the particular commodity would not be allowed to rise. Demar concerned commodities should be controlled through ra
(ii) Increase in Output: Increased production measure to control the inflation because inflation arises to inadequacy of output. Steps should be taken to increa output of these goods which seems to be extremely sensitive to inflationary pressure.
(iii) Promoting Import of Goods: To control inflation may also be taken to increase supply of consumer goods thro large scale imports from other countries.
(iv) Check on Speculation and Hoarding: To control prin rise, check on speculation and hoarding should also be done making strict laws.
Short Answer Questions
Q.1. Discuss the main causes of inflation in India.
Ans. See Page 72 and 73.
Q.2. Discuss the efforts made by the government to check inflation.
Ans. See Page 74 and 75.
Q.3. Explain the main types of inflation.
Ans. See Page 69 and 70.
Q.4. How inflation affects the producers ?
Ans. See Page 70 and 71.
Q.5. Write the effects of inflation on the labour class.
Ans. See Page 71.
Q.6. What do you understand by stagflation ? (Meerut, 2005)
Ans. Stagflation is a new type of inflation which came vogue in the post war period particularly since the sixties’. The te stagflation depicts the present day inflationary situation in world. The present day inflation is accompanied not by employment, but by increasing unemployment. In this situ high prices and high unemployment go hand in hand. It is in accompanied by stagnation on the development front. developing countries including India have also facing the proble. stagflation. The world stand today between the devil (of inflat and the deep sea (of unemployment).
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