CU-BBA-SEM-V-Global Financial Environment-Second Draft

during an economic recovery, gross domestic product (GDP) grows, incomes rise, and unemployment falls and as the economy rebounds.  Depression - If the economy does not begin to expand again then the economy may be considered to be in a state of depression. 11.7 LEARNING ACTIVITY 1. Taylor has been thinking about buying a new surfboard and has been saving the money from her part-time job for the last couple of years. She finally has enough to get the surfboard but when she visits the store, she discovers that the prices of surfboards have gone up by 10% over the past two years. Decide where in the business cycle the case study are likely to occur, e.g. at the start of an economic expansion, during an economic contraction. Also justify why you have chosen this position in the business cycle? ___________________________________________________________________________ ___________________________________________________________________________ 2. Alex has been looking for work since he left school two years ago. Recently, he has noticed that there are quite a few new businesses opening up in his town and a number of shops have ‘staff wanted’ signs in the window. He attends two interviews and is offered a job as a cleaner in a hostel? Decide where in the business cycle the case studies are likely to occur and also justify why you have chosen this position in the business cycle? ___________________________________________________________________________ ___________________________________________________________________________ 11.8 UNIT END QUESTIONS A. Descriptive Questions 201 Short Questions 1. Define Trade cycle. 2. Define output gap. 3. What is recession? 4. What is depression? 5. Define aggregate demand. Long Questions 1. What is relevance of business cycles on firms? 2. How change in economy affects business cycle? CU IDOL SELF LEARNING MATERIAL (SLM)

3. Describe the phases of trade cycle? 4. Define trade cycle as per different economist. 5. Why trade cycle is important? B. Multiple Choice Questions 1. What is the opposite of a trough in business cycle? a. Inflation b. Hyper inflation c. Peak d. Trend 2. What is the term for economics that passes judgment, or provides advice on policy actions? a. Positive economics b. Negative economics c. Normative economics d. Descriptive economics 3. What is an important indicator of nation’s wellness? a. GDP b. GNP c. GNI d. GDP or GNP 4. Which economist represents a very different point of view to that of Keynes? a. David Ricardo b. J. S. Mill c. Thomas Malthus d. Adam Smith 5. How much real income per capita in Italy declined from 2010 to 2015? a. 2% b. 4% c. 6% d. 8% 202 CU IDOL SELF LEARNING MATERIAL (SLM)

Answers 1-c, 2-c, 3-a, 4- d, 5-c 11.9 REFERENCES References  Harvey, Andrew C. and Trimbur, Thomas M. (2003). General model based filters for extracting trends and cycles in economic time series. Review of Economics and Statistics.  Morgan, Mary S. (1990). The History of Econometric Ideas. New York: Cambridge University Press.  Lee, M. W. (1955). Economic fluctuations. Homewood, IL: Richard D. Irwin Textbooks  Khan, M. (2015). The biggest debt forgiveness write-offs in the history of the world. Telegraph.  Wells, David A. (1890). Recent Economic Changes and Their Effect on Production and Distribution of Wealth and Well-Being of Society. New York: D. Appleton and Co.  Burns, A.F. and Mitchell, W.C. (1946). Measuring business cycles, New York: National Bureau of Economic Research. Websites  https://www.economicsdiscussion.net/trade-cycle/trade-cycle-meaning-features-and- theories/21071  https://www.purposeplanning.com/resource-center/investment/business-cycle  https://www.economicshelp.org/macroeconomics/economic-growth/trade-cycle/  https://www.investopedia.com/terms/e/economic-recovery.asp  https://courses.lumenlearning.com/baycollege-introbusiness/chapter/reading-the- business-cycle-definition-and-phases/ 203 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 12 – INFLATION STRUCTURE 12.0 Learning Objectives 12.1 Introduction 12.2 Definition 12.3 Types of Inflation 12.4 Causes and Effects of Inflation 12.5 Summary 12.6 Keywords 12.7 Learning Activity 12.8 Unit End Questions 12.9 References 12.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Define inflation.  Examine the different types of inflation.  Identify the cause and effects of inflation. 12.1 INTRODUCTION Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices, often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods. While it is easy to measure the price changes of individual products over time, human needs extend much beyond one or two such products. Individuals need a big and diversified set of products as well as a host of services for living a comfortable life. They include commodities like food grains, metal, fuel, utilities like electricity and transportation, and services like healthcare, entertainment and labour etc. 204 CU IDOL SELF LEARNING MATERIAL (SLM)

Inflation aims to measure the overall impact of price changes for a diversified set of products and services. It refers to a single value representation of the increase in the price level of goods and services in an economy over a period of time. As a currency loses value, prices rise and it buys fewer goods and services. This loss of purchasing power impacts the general cost of living for the common public which ultimately leads to a deceleration in economic growth. The consensus view among economists is that sustained inflation occurs when a nation's money supply growth outpaces economic growth. To combat this, a country's appropriate monetary authority, like the central bank, then takes the necessary measures to manage the supply of money and credit to keep inflation within permissible limits and keep the economy running smoothly. Theoretically, monetarism is a popular theory that explains the relation between inflation and the money supply of an economy. For example, following the Spanish conquest of the Aztec and Inca empires, massive amounts of gold and especially silver flowed into the Spanish and other European economies. Since the money supply had rapidly increased, the value of money fell, contributing to rapidly rising prices. Inflation is measured in a variety of ways depending upon the types of goods and services. It is the opposite of deflation which indicates a general decline occurring in prices for goods and services when the inflation rate falls below 0%. Inflation can be contrasted with deflation, which occurs when the purchasing power of money increases and prices decline. Inflation has consequences for people and firms throughout the economy, in their roles as lenders and borrowers, wage-earners, taxpayers, and consumers. The chapter concludes with a discussion of some imperfections and biases in the inflation statistics, and a preview of policies for fighting inflation. History of Inflation The recent expansion in the monetary base (currency in circulation and bank deposits), brought about by the Federal Reserve's quantitative easing measures, has stoked fears of high inflation. Critics argue that by flooding the economy with massive amounts of liquidity by expanding its balance sheet, the Fed may have set the stage for a possible surge in the future price level. Fears of high inflation are grounded in memories of the Great Inflation, which remain fresh in the minds of many. Soaring inflation battered the U.S. economy in the 1970s, ending only after the Fed, under Chairman Paul Volcker, applied contractionary (tight) monetary policy to rein in inflation. Though initially painful, this bold step eventually returned the inflation rate and expectations of future inflation to low and stable levels. In addition, the Fed re-established its credibility for fighting high inflation. Inflation is a rise in the general price level for goods and services. That is, inflation occurs when there is a sustained increase in prices across the board and not simply an increase in the 205 CU IDOL SELF LEARNING MATERIAL (SLM)

price of one particular good or service. The Bureau of Labour Statistics (BLS) measures inflation by creating a weighted price index from a representative sample of goods and services consumed by households. The inflation rate is then determined by observing the yearly changes in that price index. Low and stable levels of inflation usually around 2 percent are consistent with what economists consider price stability. Ever-increasing (or unexpected) bursts of inflation, however, can have some detrimental consequences. For instance, creditors may charge higher interest rates to protect themselves from the costs of high inflation (i.e., being repaid in less- valuable dollars), which can hurt borrowers and curb lending. In addition, prolonged inflation can raise the public's expectations for future inflation. Consumers who expect higher inflation in the future may demand higher wages now. In response, firms may charge higher prices, leading to a vicious cycle where expectations of higher inflation lead to further increases in the general price level. In the past century, inflation in the United States was particularly high during World Wars I and II and the Korean War. The most recent spike in inflation occurred during the Great Inflation. The Great Inflation, which started in the mid-1960s, lasted for almost two decades and only began to dissipate in the early 1980s. During that time, the inflation rate soared from a mere 1.6 percent in 1965 to 13.5 percent in 1980 (see top chart). Inflation has been relatively tame since its rapid decline in the early 1980s. The highest rate observed was only 5.5 percent during the commodity price boom in July 2008. Certain economists attribute the Great Inflation primarily to monetary policy mistakes rather than other purported causes, such as high oil prices and defence spending during the Vietnam War. In the 1960s, Fed officials and prominent economists generally believed expansionary monetary policy could propel the economy toward full employment. In other words, they believed that elevated levels of inflation brought about by expansionary monetary policy would be tolerable as long as the policy spurred economic growth and brought unemployment down to its natural rate. Underlying this policy was the Phillips curve, which suggests that a trade-off exists between inflation and unemployment. Because some policymakers believed unemployment was above its natural rate at that time, they were more inclined to allow inflation to rise and move the economy toward its potential output. However, the natural rate was often underestimated: Economist Athanasios Orphanides (2002) found that the Fed may have overcommitted to its expansionary monetary policy stance because it was constantly aiming for but never able to achieve an \"optimal\" 4 percent unemployment rate. Inflation ticked up throughout the 1970s until the Fed, under Chairman Volcker, took drastic measures to promote greater price stability. A special Federal Open Market Committee (FOMC) meeting on October 6, 1979, put in motion unique policy actions to combat the persistent surge in inflation. The Committee decided to target (i.e., reduce) specifically the growth rate of the money stock in the economy. Consequently, the federal 206 CU IDOL SELF LEARNING MATERIAL (SLM)

funds rate soared from 10 percent at the start of 1979 to 19 percent by the middle of 1981, signalling the effects of tightening monetary policy designed to reduce inflation.The Volcker disinflation, along with other factors, severely weakened the U.S. economy and resulted in two recessions in the early 1980s. Real (or inflation-adjusted) output remained stagnant from 1979 to 1982, and unemployment rose to more than 10 percent (see bottom chart). In addition, businesses failed in large numbers as access to capital became constrained due to higher interest rates. Specifically, almost 25,000 businesses failed in 1982—a post-war high that climbed to over 52,000 failures by 1984 (Samuelson, 2008). Credit-dependent sectors of the economy felt an even stronger pinch; sales of homes and cars suffered dramatically. Volcker's medicine was a tough pill to swallow at first, but it eventually had the desired effect. By the mid-1980s, inflation started to dip below 5 percent and has remained relatively stable ever since. Two key lessons from the Great Inflation era remain relevant for the Federal Reserve today. First, price stability is paramount for a strong and growing economy. The Great Inflation showed that tolerating high levels of inflation in an effort to stimulate the economy would ultimately prove detrimental.6 Second, the public must be confident in the Fed's ability to lessen inflationary pressures both now and in the future. In the 1970s, tepid policy responses by the Fed caused the public to lose faith in the Fed's ability to keep inflation in check. It was only after Chairman Volcker and the FOMC maintained a difficult policy stance that people began (slowly) to expect lower and less volatile inflation in the future that is, price stability. With such hard-won trust, central bankers have been able to use monetary policy aggressively to stabilize economic conditions during the recent financial crisis. Low and stable inflation expectations continue to be evident; as long as this persists, we can infer that confidence remains strong in the Fed's ability to keep inflation at an appropriate level for the future. 12.2 DEFINITION Inflation is an economic term that refers to an environment of generally rising prices of goods and services within a particular economy. As general prices rise, the purchasing power of consumers decreases. The measure of inflation over time is referred to as the rate of inflation or the inflation rate. Commonly, people may refer to inflation as \"the rising cost of living.\" For example, prices for many consumer goods are double that of 20 years ago. When you hear your grandparents recall, \"A movie and a bag of popcorn only cost a buck-twenty-five when I was your age,\" they are making an observation about inflation the rising cost of goods and services over time, and the decrease in the purchasing power of the dollar. 12.3 TYPES OF INFLATION 207 CU IDOL SELF LEARNING MATERIAL (SLM)

There are different forms of inflation in the economy. The different types of inflation are Demand-Pull Inflation, Cost-push inflation, Open Inflation, Repressed Inflation, Hyper- Inflation, Creeping and Moderate inflation, True inflation, and Semi inflation. Let us look at each one in detail –  Demand Pull Inflation This is when the aggregate demand in an economy exceeds the aggregate supply. This increase in the aggregate demand might occur due to an increase in the money supply or income or the level of public expenditure. This concept is associated with full employment when altering the supply is not possible. Take a look at the graph below: Figure 12.1: Demand pull inflation In the graph above, SS is the aggregate supply curve and DD is the aggregate demand curve. Further, Op is the equilibrium price Oq is the equilibrium output Exogenous causes shift the demand curve to the right to D1D1. Therefore, at the current price (Op), the demand increases by qq2. However, the supply is Oq. Hence, the excess demand for qq2 puts pressure on the price, increasing it to Op1. Therefore, there is a new equilibrium at this price, where demand equals supply.  Cost-Push Inflation 208 CU IDOL SELF LEARNING MATERIAL (SLM)

Supply can also cause inflationary pressure. If the aggregate demand remains unchanged but the aggregate supply falls due to exogenous causes, then the price level increases. Take a look at the graph below: Figure12.2: Cost push inflation In the graph above, the equilibrium price is Op and the equilibrium output is Oq. If the aggregate supply falls, then the supply curve SS shifts left to reach S1S1. Now, at the price Op, the demand is Oq but the supply is Oq2 which is lesser than Oq. Therefore, the prices are pushed high till a new equilibrium is reached at Op1. At this point, there is no excess demand. Hence, you can see that inflation is a self- limiting phenomenon.  Open Inflation This is the simplest form of inflation where the price level rises continuously and is visible to people.  Repressed Inflation Let’s say that there is excess demand in an economy. Typically, this leads to an increase in price. However, the Government can take some repressive measures like price control, rationing, etc. to prevent the excess demand from increasing the prices.  Hyper-Inflation In hyperinflation, the price level increases at a rapid rate. In fact, you can expect prices to increase every hour. Usually, this leads to the demonetization of an economy.  Creeping and Moderate Inflation i. Creeping – In this case, the price level increases very slowly over an extended period of time. 209 CU IDOL SELF LEARNING MATERIAL (SLM)

ii. Moderate – In this case, the rise in the price level is neither too fast nor too slow – it is moderate.  True Inflation This takes place after the full employment of all the factor inputs of an economy. When there is full employment, the national output becomes perfectly inelastic. Therefore, more money simply implies higher prices and not more output.  Semi-Inflation Even before full employment, an economy might face inflationary pressure due to bottlenecks from certain sectors of the economy. 12.4 CAUSES AND EFFECTS OF INFLATION Inflation is mainly caused by excess demand/ or decline in aggregate supply or output. Former leads to a rightward shift of the aggregate demand curve while the latter causes aggregate supply curve to shift leftward. Former is called demand-pull inflation (DPI), and the latter is called cost-push inflation (CPI). Before describing the factors that lead to a rise in aggregate demand and a decline in aggregate supply, we like to explain “demand-pull” and “cost-push” theories of inflation. Demand-Pull Inflation Theory- There are two theoretical approaches to the DPI—one is classical and other is the Keynesian. According to classical economists or monetarists, inflation is caused by an increase in money supply which leads to a rightward shift in negative sloping aggregate demand curve. Given a situation of full employment, classicists maintained that a change in money supply brings about an equal proportionate change in price level. That is why monetarists argue that inflation is always and everywhere a monetary phenomenon. Keynesians do not find any link between money supply and price level causing an upward shift in aggregate demand. According to Keynesians, aggregate demand may rise due to a rise in consumer demand or investment demand or government expenditure or net exports or the combination of these four components of aggregate demand. Given full employment, such increase in aggregate demand leads to an upward pressure in prices. Such a situation is called DPI. Causes of Demand-Pull Inflation- DPI originate in the monetary sector. Monetarists’ argument that “only money matters” is based on the assumption that at or near full employment excessive money supply will increase aggregate demand and will, thus, cause inflation. An increase in nominal money supply shifts aggregate demand curve rightward. This enables people to hold excess cash balances. Spending of excess cash balances by them cause’s price level to rise. Price level will continue to rise until aggregate demand equals aggregate supply. Keynesians argue that inflation originates in the non-monetary sector or the real sector. Aggregate demand may rise if there is an increase in consumption expenditure 210 CU IDOL SELF LEARNING MATERIAL (SLM)

following a tax cut. There may be an autonomous increase in business investment or government expenditure. Government expenditure is inflationary if the needed money is procured by the government by printing additional money. In brief, increase in aggregate demand causes price level to rise. However, aggregate demand may rise following an increase in money supply generated by the printing of additional money (classical argument) which drives prices upward. Thus, money plays a vital role. That is why Milton Friedman argues that inflation is always and everywhere a monetary phenomenon. There are other reasons that may push aggregate demand and, hence, price level upwards. For instance, growth of population stimulates aggregate demand. Higher export earnings increase the purchasing power of the exporting countries. Additional purchasing power means additional aggregate demand. Purchasing power and, hence, aggregate demand may also go up if government repays public debt. Again, there is a tendency on the part of the holders of black money to spend more on conspicuous consumption goods. Such tendency fuels inflationary fire. Thus, DPI is caused by a variety of factors. Cost-Push Inflation Theory: In addition to aggregate demand, aggregate supply also generates inflationary process. As inflation is caused by a leftward shift of the aggregate supply, we call it CPI. CPI is usually associated with non-monetary factors. CPI arises due to the increase in cost of production. Cost of production may rise due to a rise in cost of raw materials or increase in wages. However, wage increase may lead to an increase in productivity of workers. If this happens, then the AS curve will shift to the right- ward not leftward— direction. We assume here that productivity does not change in spite of an increase in wages. Such increases in costs are passed on to consumers by firms by raising the prices of the products. Rising wages lead to rising costs. Rising costs lead to rising prices. And, rising prices again prompt trade unions to demand higher wages. Thus, an inflationary wage-price spiral starts. This causes aggregate supply curve to shift leftward. Causes of Cost-Push Inflation: It is the cost factors that pull the prices upward. One of the important causes of price rise is the rise in price of raw materials. For instance, by an administrative order the government may hike the price of petrol or diesel or freight rate. Firms buy these inputs now at a higher price. This leads to an upward pressure on cost of production. Not only this, CPI is often imported from outside the economy. Increase in the price of petrol by OPEC compels the government to increase the price of petrol and diesel. These two important raw materials are needed by every sector, especially the transport sector. As a result, transport costs go up resulting in higher general price level. Again, CPI may be induced by wage-push inflation or profit-push inflation. Trade unions demand higher money wages as a compensation against inflationary price rise. If increase in money wages exceedslabour productivity, aggregate supply will shift upward and leftward. Firms often exercise power by pushing prices up independently of consumer demand to expand their profit margins. Fiscal policy changes, such as increase in tax rates also leads to an upward pressure in cost of production. For instance, an overall increase in excise tax of mass 211 CU IDOL SELF LEARNING MATERIAL (SLM)

consumption goods is definitely inflationary. That is why government is then accused of causing inflation. Finally, production setbacks may result in decreases in output. Natural disaster, gradual exhaustion of natural resources, work stoppages, electric power cuts, etc., may cause aggregate output to decline. In the midst of this output reduction, artificial scarcity of any goods created by traders and hoarders just simply ignite the situation. Inefficiency, corruption, mismanagement of the economy may also be the other reasons. Thus, inflation is caused by the interplay of various factors. A particular factor cannot be held responsible for any inflationary price rise. Effects of Inflation: People’s desires are inconsistent. When they act as buyers they want prices of goods and services to remain stable but as sellers they expect the prices of goods and services should go up. Such a happy outcome may arise for some individuals; “but, when this happens, others will be getting the worst of both worlds.” When price level goes up, there is both a gainer and a loser. To evaluate the consequence of inflation, one must identify the nature of inflation which may be anticipated and unanticipated. If inflation is anticipated, people can adjust with the new situation and costs of inflation to the society will be smaller. In reality, people cannot predict accurately future events or people often make mistakes in predicting the course of inflation. In other words, inflation may be unanticipated when people fail to adjust completely. This creates various problems. One can study the effects of unanticipated inflation under two broad headings:  Effects of Inflation on Distribution of Income and Wealth During inflation, usually people experience rise in incomes. But some people gain during inflation at the expense of others. Some individuals gain because their money incomes rise more rapidly than the prices and some lose because prices rise more rapidly than their incomes during inflation. Thus, it redistributes income and wealth. Though no conclusive evidence can be cited, it can be asserted that following categories of people are affected by inflation differently: i. Creditors and debtors- Borrowers gain and lenders lose during inflation because debts are fixed in rupee terms. When debts are repaid their real value declines by the price level increase and, hence, creditors lose. An individual may be interested in buying a house by taking loan of Rs. 7 lakh from an institution for 7 years. The borrower now welcomes inflation since he will have to pay less in real terms than when it was borrowed. Lender, in the process, loses since the rate of interest payable remains unaltered as per agreement. Because of inflation, the borrower is given ‘dear’ rupees, but pays back ‘cheap’ rupees. However, if in inflationridden economy creditors chronically loose, it is wise not to advance loans or to shut down business. Never does it happen. Rather, the loan-giving institution makes adequate safeguard against the erosion of real value. Above all, banks do not pay any interest on current account but charges interest on loans. 212 CU IDOL SELF LEARNING MATERIAL (SLM)

ii. Bond and debenture holders- In an economy, there are some people who live on interest income—they suffer most. Bondholders earn fixed interest income: These people suffer a reduction in real income when prices rise. In other words, the value of one’s savings decline if the interest rate falls short of inflation rate. Similarly, beneficiaries from life insurance programmes are also hit badly by inflation since real value of savings deteriorate. iii. Investors- People who put their money in shares during inflation are expected to gain since the possibility of earning of business profit brightens. Higher profit induces owners of firm to distribute profit among investors or shareholders. iv. Salaried people and wage-earners- Anyone earning a fixed income is damaged by inflation. Sometimes, unionized worker succeeds in raising wage rates of white- collar workers as compensation against price rise. But wage rate changes with a long time lag. In other words, wage rate increases always lag behind price increases. Naturally, inflation results in a reduction in real purchasing power of fixed income-earners. On the other hand, people earning flexible incomes may gain during inflation. The nominal incomes of such people outstrip the general price rise. As a result, real incomes of this income group increase. v. Profit-earners, speculators and black marketers: It is argued that profit-earners gain from inflation. Profit tends to rise during inflation. Seeing inflation, businessmen raise the prices of their products. This results in a bigger profit. Profit margin, however, may not be high when the rate of inflation climbs to a high level. However, speculators dealing in business in essential commodities usually stand to gain by inflation. Black marketers are also benefited by inflation. Thus, there occurs a redistribution of income and wealth. It is said that rich becomes richer and poor becomes poorer during inflation. However, no such hard and fast generalization can be made. It is clear that someone wins and someone loses during inflation. These effects of inflation may persist if inflation is unanticipated. However, the redistributive burdens of inflation on income and wealth are most likely to be minimal if inflation is anticipated by the people. With anticipated inflation, people can build up their strategies to cope with inflation. If the annual rate of inflation in an economy is anticipated correctly people will try to protect them against losses resulting from inflation. Workers will demand 10 p.c. wage increase if inflation is expected to rise by 10 p.c. Similarly, a percentage of inflation premiums will be demanded by creditors from debtors. Business firms will also fix prices of their products in accordance with the anticipated price rise. Now if the entire society “learn to live with inflation”, the redistributive effect of inflation will be minimal. However, it is difficult to anticipate properly every episode of inflation. Further, even if it is anticipated it cannot be perfect. In addition, adjustment with the new expected inflationary conditions may not be 213 CU IDOL SELF LEARNING MATERIAL (SLM)

possible for all categories of people. Thus, adverse redistributive effects are likely to occur. Finally, anticipated inflation may also be costly to the society. If people’s expectation regarding future price rise become stronger they will hold less liquid money. Mere holding of cash balances during inflation is unwise since its real value declines. That is why people use their money balances in buying real estate, gold, jewellery, etc. Such investment is referred to as unproductive investment. Thus, during inflation of anticipated variety, there occurs a diversion of resources from priority to non-priority or unproductive sectors.  Effect on Production and Economic Growth Inflation may or may not result in higher output. Below the full employment stage, inflation has a favourable effect on production. In general, profit is a rising function of the price level. An inflationary situation gives an incentive to businessmen to raise prices of their products so as to earn higher volume of profit. Rising price and rising profit encourage firms to make larger investments. As a result, the multiplier effect of investment will come into operation resulting in a higher national output. However, such a favourable effect of inflation will be temporary if wages and production costs rise very rapidly. Further, inflationary situation may be associated with the fall in output, particularly if inflation is of the cost-push variety. Thus, there is no strict relationship between prices and output. An increase in aggregate demand will increase both prices and output, but a supply shock will raise prices and lower output. Inflation may also lower down further production levels. It is commonly assumed that if inflationary tendencies nurtured by experienced inflation persist in future, people will now save less and consume more. Rising saving propensities will result in lower further outputs. One may also argue that inflation creates an air of uncertainty in the minds of business community, particularly when the rate of inflation fluctuates. In the midst of rising inflationary trend, firms cannot accurately estimate their costs and revenues. That is, in a situation of unanticipated inflation, a great deal of risk element exists. It is because of uncertainty of expected inflation; investors become reluctant to invest in their business and to make long-term commitments. Under the circumstance, business firms may be deterred in investing. This will adversely affect the growth performance of the economy. However, slight dose of inflation is necessary for economic growth. Mild inflation has an encouraging effect on national output. But it is difficult to make the price rise of a creeping variety. High rate of inflation acts as a disincentive to long run economic growth. The way the hyperinflation affects economic growth is summed up here. We know that hyper-inflation discourages savings. A fall in savings means a lower rate of capital formation. A low rate of capital formation hinders economic growth. Further, during excessive price rise, there occurs an increase in unproductive investment in real estate, gold, jewellery, etc. Above all, speculative businesses flourish during inflation resulting in artificial scarcities and, hence, further rise in prices. Again, following 214 CU IDOL SELF LEARNING MATERIAL (SLM)

hyperinflation, export earnings decline resulting in a wide imbalances in the balance of payment account. Often galloping inflation results in a ‘flight’ of capital to foreign countries since people lose confidence and faith over the monetary arrangements of the country, thereby resulting in a scarcity of resources. Finally, real value of tax revenue also declines under the impact of hyperinflation. Government then experiences a shortfall in investible resources. Thus economists and policymakers are unanimous regarding the dangers of high price rise. But the consequence of hyperinflation is disastrous. In the past, some of the world economies (e.g., Germany after the First World War (1914-1918), Latin American countries in the 1980s) had been greatly ravaged by hyperinflation. Cause of Inflation using economic factor  Money Supply An increase in the money supply — that is, government literally printing money — can provoke inflation if it outpaces economic growth. When the U.S. Federal Reserve (the Fed) puts money into circulation faster than the economy demands it, the value of a dollar goes down. Think of dollars in this case like collector’s items: The rarer they are the more valuable.  National Debt When the national debt is high in relation to how much income a country can generate (GDP), a government can either raise taxes or print more money to pay it off. Higher taxes mean higher costs for producers, which leads to higher prices. Printing more money increases the money supply and devalues the currency.  Exchange Rates In a global economy, the value of the U.S. dollar compared with international currencies affects prices in the U.S. When the dollar is less valuable compared with a trade partner’s currency, imported goods cost more to U.S. consumers. Common effects of inflation  Prices Rise The most obvious effect of inflation is higher prices on everyday goods and services. That means a higher cost of living, but also generally higher wages.  Interest Rates Go Up To keep inflation from rising out of control, the Fed typically raises the market interest rate to increase the cost of borrowing money and keep from pumping too much money into consumers’ hands and spiking demand and prices.  Debt Is Cheaper 215 CU IDOL SELF LEARNING MATERIAL (SLM)

If the inflation rate is greater than your interest rate on debt, you benefit by repaying the debt with less-valuable money. In countries that don’t manage interest rates as the U.S. does, debt becomes cheaper with inflation, which can accelerate inflation further.  Saving Is Deterred If the inflation rate is higher than the yield on a savings account or the return on investments, consumers are incentivized to spend now rather than save money that will lose purchasing power over time. Raising interest rates in the U.S. helps savings keep up with inflation to avoid this dilemma. 12.5 SUMMARY  Inflation is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising. Inflation is sometimes classified into three types: Demand-Pull inflation, Cost-Push inflation, and Built-In inflation.  The most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).  The CPI is a measure that examines the weighted average of prices of a basket of goods and services which are of primary consumer needs. They include transportation, food, and medical care. CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them based on their relative weight in the whole basket. The prices in consideration are the retail prices of each item, as available for purchase by the individual citizens.  Inflation can be viewed positively or negatively depending on the individual viewpoint and rate of change. Those with tangible assets, like property or stocked commodities, may like to see some inflation as that raises the value of their assets.  Demand-pull inflation occurs when an increase in the supply of money and credit stimulates overall demand for goods and services in an economy to increase more rapidly than the economy's production capacity. This increases demand and leads to price rises.  Cost-push inflation is a result of the increase in prices working through the production process inputs. When additions to the supply of money and credit are channelled into a commodity or other asset markets and especially when this is accompanied by a negative economic shock to the supply of key commodities, costs for all kinds of intermediate goods rise.  Built-in inflation is related to adaptive expectations, the idea that people expect current inflation rates to continue in the future. As the price of goods and services 216 CU IDOL SELF LEARNING MATERIAL (SLM)

rises, workers and others come to expect that they will continue to rise in the future at a similar rate and demand more costs or wages to maintain their standard of living. Their increased wages result in higher cost of goods and services, and this wage- price spiral continues as one factor induces the other and vice-versa.  Two key lessons from the Great Inflation era remain relevant for the Federal Reserve today.First, price stability is paramount for a strong and growing economy. The Great Inflation showed that tolerating high levels of inflation in an effort to stimulate the economy would ultimately prove detrimental.6 Second, the public must be confident in the Fed's ability to lessen inflationary pressures both now and in the future.  Other measures of the inflation rate can be obtained by using the personal consumption expenditure or gross domestic product deflator price indexes. Month- to-month changes in those indexes can also be used in place of year-over-year changes to provide additional indications of short-term price changes.  The tax treatment of capital gains has other unique features. One is that capital gains are not indexed for inflation: the seller pays tax not only on the real gain in purchasing power, but also on the illusory gain attributable to inflation. The inflation penalty is one reason that, historically, capital gains have been taxed at lower rates than ordinary income. In fact, Alan Blinder, a former member of the Federal Reserve Board, noted in 1980 that, up until that time, “most capital gains were not gains of real purchasing power at all, but simply represented the maintenance of principal in an inflationary world. 12.6 KEYWORDS  The Wholesale Price Index -The WPI is another popular measure of inflation, which measures and tracks the changes in the price of goods in the stages before the retail level. While WPI items vary from one country to other, they mostly include items at the producer or wholesale level. For example, it includes cotton prices for raw cotton, cotton yarn, cotton gray goods, and cotton clothing.  The Producer Price Index -The producer price index is a family of indexes that measures the average change in selling prices received by domestic producers of intermediate goods and services over time. The PPI measures price changes from the perspective of the seller and differs from the CPI which measures price changes from the perspective of the buyer.  Inflation rate - The inflation rate is the percentage change in the price index for a given period compared to that recorded in a previous period. It is usually calculated on a year-on-year or annual basis. 217 CU IDOL SELF LEARNING MATERIAL (SLM)

 Deflation - Deflation is the opposite of inflation. It is a decrease in the general price level of goods and services and represents an increase in the value of money, where an amount of money can be exchanged for more goods and services.  Basket of goods and services- Basket of goods and services a hypothetical group of different items, with specified quantities of each one meant to represent a “typical” set of consumer purchases, used as a basis for calculating how the price level changes over time.  Core inflation index - Core inflation index a measure of inflation typically calculated by taking the CPI and excluding volatile economic variables such as food and energy prices to better measure the underlying and persistent trend in long-term prices.  Hyperinflation - Hyperinflation an outburst of high inflation that is often seen (although not exclusively) when economies shift from a controlled economy to a market-oriented economy.  International Price Index - International Price Index a measure of inflation based on the prices of merchandise that is exported or imported.  Liquidity: The quality that makes an asset easily convertible into cash with relatively little loss of value in the conversion process.  Natural rate of unemployment: The unemployment rate that stems from economic factors unrelated to changes in aggregate demand.  Potential output: The level of full gross domestic product that the economy would produce if all prices, including nominal wages, were fully flexible.  Price stability: A low and stable rate of inflation maintained over an extended period of time.  Quantitative easing: A monetary policy in which a central bank makes large-scale asset purchases designed to bolster financial market conditions. 12.7 LEARNING ACTIVITY 1. Give real examples from world history pertaining to hyperinflation? ___________________________________________________________________________ ___________________________________________________________________________ 2. Discuss the rise of inflation in India and its effect on Indian economy? ___________________________________________________________________________ ___________________________________________________________________________ 218 CU IDOL SELF LEARNING MATERIAL (SLM)

12.8 UNIT END QUESTIONS 219 A. Descriptive Questions Short Questions 1. Define Consumer price index. 2. What is inflation? 3. State the definition of deflation. 4. Describe wholesale price index. 5. Define cost push inflation. Long Questions 1. What is effect of inflation on economic growth? 2. Describe inflation and its types. 3. How do black marketers gain from inflations? 4. List the effect of inflation on income and wealth. 5. Explain inflation with the help of example. B. Multiple Choice Questions 1. What is the term when prices are falling continuously? a. Inflation b. Stagflation c. Deflation d. Reflation 2. What is the term when too much money chases too few goods? a. Deflation b. Demand-pull Inflation c. Cost push inflation d. Stagflation 3. What is the Cause of Inflation in India? a. Deficit financing b. Erratic agriculture growth c. Inadequate rise in industrial production d. All of these CU IDOL SELF LEARNING MATERIAL (SLM)

4. What is the meaning of stagflation? a. Inflation with stagnation b. Recession with stagnation c. Inflation galloping like stage d. Inflation & increasing output 5. Which measures are followed by the government for handling inflation? a. Monetary measures b. Fiscal measures c. Controlling Investments d. All of these Answers 1-c, 2-b, 3-d, 4- a, 5-d 12.9 REFERENCES References  Tracy, James D. (1994). Handbook of European History 1400–1600: Late Middle Ages, Renaissance, and Reformation. Boston: Brill Academic Publishers.  Kiley, Michael J. (2008). Estimating the common trend rate of inflation for consumer prices and consumer prices excluding food and energy prices. Federal Reserve Board.  Robert Barro and Vittorio Grilli (1994), European Macroeconomics, Macmillan. Textbooks  Gordon, R. J. (1988). Macroeconomics: Theory and Policy (2nd ed.). McGraw-Hill.  Friedman, M. and Schwartz, A. (1963). A Monetary History of the United States:Princeton University Press.  Bulkley, George (March 1981). \"Personal Savings and Anticipated Inflation\". The Economic Journal. Websites  https://www.business-standard.com/about/what-is- inflation#:~:text=Inflation%20can%20be%20defined%20as,commodities%2C%20d one%20at%20regular%20intervals 220 CU IDOL SELF LEARNING MATERIAL (SLM)

 https://www.investopedia.com/ask/answers/111314/what-causes-inflation-and-does- anyone-gain-it.asp  https://www.clevelandfed.org/en/our-research/center-for-inflation-research/inflation- 101/why-does-the-fed-care-get-started.aspx  https://www.econlib.org/library/Topics/College/inflation.html  https://openstax.org/books/principles-economics-2e/pages/22-introduction-to- inflation 221 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 13 – MEASURES TO CONTROL INFLATION STRUCTURE 13.0 Learning Objectives 13.1 Introduction 13.2 Measures to Control Inflation 13.2.1 Monetary Policy 13.2.2 Fiscal Policy 13.2.3 \"Built-in\" Fiscal Policy 13.3 Summary 13.4 Keywords 13.5 Learning Activity 13.6 Unit End Questions 13.7 References 13.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Discuss measures to control inflation.  Examine the need to control inflation.  Define monetary, fiscal and built in fiscal policy. 13.1 INTRODUCTION Inflation is caused by the failure of aggregate supply to equal the increase in aggregate demand. Inflation can, therefore, be controlled by increasing the supplies of goods and services and reducing money incomes in order to control aggregate demand. Inflation occurs when an economy grows due to increased spending without a concomitant increase in the production of goods and services. When this happens, prices rise and the currency within the economy is worth less than it was before. The currency essentially won’t buy as much as it would before. When a currency is worth less, its exchange rate weakens when compared to other currencies. However, this depends on whether other countries are inflating less than yours. If they are inflating faster than your country, your currency might strengthen, which is a basic purchasing power parity argument. 222 CU IDOL SELF LEARNING MATERIAL (SLM)

There are many methods used to control inflation; some work well, while others may have damaging effects. For example, controlling inflation through wage and price controls can cause a recession and cause job losses.  Contractionary monetary policy One popular method of controlling inflation is through a contractionary monetary policy. The goal of a contractionary policy is to reduce the money supply within an economy by decreasing bond prices and increasing interest rates. This helps reduce spending because when there is less money to go around: those who have money want to keep it and save it, instead of spending it. It also means there is less available credit, which can reduce spending. Reducing spending is important during inflation because it helps halt economic growth and, in turn, the rate of inflation.  Reserve Requirements The second tool is to increase reserve requirements on the amount of money banks are legally required to cover withdrawals. The more money banks are required to hold back, the less they have to lend to consumers. If they have less to lend, consumers will borrow less, which will decrease spending.  Reducing the Money Supply The third method is to directly or indirectly reduce the money supply by enacting policies that encourage the reduction of the money supply. Two examples of this include calling in debts that are owed to the government and increasing the interest paid on bonds so that more investors will buy them. The latter policy raises the exchange rate of the currency due to higher demand (through capital inflows if your rates are increasing relative to foreign rates) and, in turn, increases imports and decreases exports. Both of these policies will reduce the amount of money in circulation because the money will be going from banks, companies and investors' pockets and into the government’s pocket where it can control what happens to it. 13.2 MEASURES TO CONTROL INFLATION Controlling inflation is an important part of RBIs functioning core. There are certain measures that are employed by the Central bank to restrict inflation and control cash flow. Here are a few of those methods. Repo rate is the percentage with which RBI (Reserve Bank of India) lends money to commercial banks. The repo rate is very important in terms of the monetary outflow from the government. The repo rate comes into play usually when commercial banks are short of money and needs to lend from the RBI. Another important instrument is the CRR (Cash Reserve Ratio) which is employed by the RBI as the amount commercial banks need to keep with them by default. Reverse Repo Rate is another 223 CU IDOL SELF LEARNING MATERIAL (SLM)

consideration, as it is the rate at which commercial banks lend money to the RBI. Here are the practical uses of all three of these banking terms. Repo Rate Whenever commercial banks face a shortage of funds, they can approach the RBI for a loan. The repo rate is the rate at which it would be possible for commercial banks to borrow money from the RBI. Repo rate is often used by the government as a tool for inflation. Whenever the government wants to restrict the flow of money in the economy, it can increase the repo rate as deterrence for commercial banks to borrow money. Thus, repo rate makes for a very important financial instrument that is reflexively used to restrict the quantity of cash. CRR (Cash Reserve Ratio) CRR is another measure that excels in controlling the amount of money the commercial banks are able to circulate into the economy. This is because CRR represents a certain amount of money that is commercial by law stipulated to keep with the RBI. Inflation can be directly controlled by the central government simply by means of increasing the CRR rate and thereby restricting the ability of commercial banks to lend money. Reverse Repo Rate Reverse Repo rate is the rate at which the RBI borrows from commercial banks. This is part of a liquidity adjustment facility employed by central banks to resolve short term cash shortages that an economy might end up facing. Reverse repo rate is usually set 1 percentile lower than the existing repo rate. This is also done in a bid to control inflation as reverse repo rate helps RBI extract money from the economy when it feels like there is excessive cash rolling about in the economy. The Need to Control Inflation When the quantity of money rises above a certain threshold, the increased buying power of the consumer class, can lead to a shortage of goods and services. This is because capitalism, thrives on the idea that infinite resources can be employed to satiate the needs of a growing demographic is slightly flawed. This is what generates the need for measures like the repo rate, CRR and the Reverse Repo Rate. They help restrict cash flow and keep inflation in check. These measures help bring a certain balance to the whole economic framework that the world laboriously functions under. Central bank uses certain methods to inordinately function and maintain a level of balance to the Indian economy. The aspects mentioned in this article are a few of those methods that help keep the economy fresh and vibrant. This is because controlling inflation is a highly critical step in the direction of conceiving a system that is financially reaching equilibrium. Inflation is an economic term describing the sustained increase in prices of goods and services within a period. To some, inflation signifies a struggling economy, whereas others 224 CU IDOL SELF LEARNING MATERIAL (SLM)

see it as a sign of a prospering economy. Here, we examine some of the residual effects of inflation. The different measures used for controlling inflation are –  Monetary  Fiscal  Other measures 13.2.1 Monetary Policy The government of a country takes several measures and formulates policies to control economic activities. Monetary policy is one of the most commonly used measures taken by the government to control inflation. In monetary policy, the central bank increases rate of interest on borrowings for commercial banks. As a result, commercial banks increase their rate of interests on credit for the public. In such a situation, individuals prefer to save money instead of investing in new ventures. This would reduce money supply in the market, which, in turn, controls inflation. Apart from this, the central bank reduces the credit creation capacity of commercial banks to control inflation. Thus, the monetary policy of a country involves the following –  Rise in Bank Rate - Refers to one of the most widely used measure taken by the central bank to control inflation. The bank rate is the rate at which the commercial bank gets a rediscount on loans and advances by the central bank. The increase in the bank rate results in the rise of rate of interest on loans for the public. This leads to the reduction in total spending of individuals.  Direct Control on Credit Creation - Constitutes the major part of monetary policy. The central bank directly reduces the credit control capacity of commercial banks by using the following methods- i. Performing Open Market Operations (OMO) OMO refers to one of the important method used by the central bank to reduce the credit creation capacity of commercial banks. The central bank issues government securities to commercial banks and certain private businesses. In this way, the cash with commercial banks would be spent on purchasing government securities. As a result, commercial bank would reduce credit supply for the general public. ii. Changing Reserve Ratios 225 CU IDOL SELF LEARNING MATERIAL (SLM)

Involves increase or decrease in reserve ratios by the central bank to reduce the credit creation capacity of commercial banks. For example, when the central bank needs to reduce the credit creation capacity of commercial banks, it increases Cash Reserve Ratio (CRR). As a result, commercial banks need to keep a large amount of cash as reserve from their total deposits with the central bank. This would further reduce the lending capacity of commercial banks. Consequently, the investment by individuals in an economy would also reduce. 13.2.2 Fiscal Policy Apart from monetary policy, the government also uses fiscal measures to control inflation. The two main components of fiscal policy are government revenue and government expenditure. In fiscal policy, the government controls inflation either by reducing private spending or by decreasing government expenditure, or by using both. It reduces private spending by increasing taxes on private businesses. When private spending is more, the government reduces its expenditure to control inflation. However, in present scenario, reducing government expenditure is not possible because there may be certain on- going projects for social welfare that cannot be postponed. Besides this, the government expenditures are essential for other areas, such as defence, health, education, and law and order. In such a case, reducing private spending is more preferable rather than decreasing government expenditure. When the government reduces private spending by increasing taxes, individuals decrease their total expenditure. For example, if direct taxes on profits increase, the total disposable income would reduce. As a result, the total spending of individuals decreases, which, in turn, reduces money supply in the market. Therefore, at the time of inflation, the government reduces its expenditure and increases taxes for dropping private spending. 13.2.3 \"Built-in\" Fiscal Policy Built-in or Automatic stabilizers offset fluctuations in economic activity without direct intervention by policymakers. When incomes are high, tax liabilities rise and eligibility for government benefits falls, without any change in the tax code or other legislation. Conversely, when incomes slip, tax liabilities drop and more families become eligible for government transfer programs such as food stamps and unemployment insurance that help buttress their income. Automatic stabilizers are quantitatively important at the federal level. A 2000 study estimated that reduced income and payroll tax collection offset about 8 percent of any decline in gross domestic product (GDP). Additional stabilization from unemployment insurance, although smaller than that from the tax system, is estimated to be eight times as effective per dollar of lost revenue because more of the money is spent rather than saved. Altogether, a 2016 study 226 CU IDOL SELF LEARNING MATERIAL (SLM)

estimated that if transfer payments were reduced in size by 0.6 percent of GDP, US output and hours worked would be about 6 and 9 percent more volatile, respectively. Automatic stabilizers also arise in the tax and transfer systems of state and local governments. However, state constitutions generally require balanced budgets, which can force countervailing changes in outlays and tax rules. These requirements do not force complete balance annually: they generally focus on budget projections rather than realizations, so deficits can still occur when economic conditions are unexpectedly weak. In addition, many governments have \"rainy day\" funds they can draw down during periods of budget stringency. Even so, most state and local governments respond to an economic slowdown by legislating lower spending or higher taxes. These actions are contractionary, working at cross-purposes with automatic stabilizers. 13.3 SUMMARY  The government has two levers when setting fiscal policy: it can change the levels of taxation and/or it can change its level of spending.  There are three types of fiscal policy: neutral policy, expansionary policy, and contractionary policy.  In expansionary fiscal policy, the government spends more money than it collects through taxes. This type of policy is used during recessions to build a foundation for strong economic growth and nudge the economy toward full employment.  In contractionary fiscal policy, the government collects more money through taxes than it spends. This policy works best in times of economic booms. It slows the pace of strong economic growth and puts a check on inflation.  Aggregate demand is made up of consumption, investment, government spending, and net exports. The aggregate demand curve will shift as a result of changes in any of these components.  Expansionary policy involves an increase in government spending, a reduction in taxes, or a combination of the two. It leads to a right-ward shift in the aggregate demand curve.  Contractionary policy involves a decrease in government spending, an increase in taxes, or a combination of the two. It leads to a left-ward shift in the aggregate demand curve.  Keynes advocated counter-cyclical fiscal policies –implementing an expansionary fiscal policy during a recession and a contractionary policy during times of rapid economic expansion. 227 CU IDOL SELF LEARNING MATERIAL (SLM)

 In pursuing either expansionary or contractionary fiscal policy, the government has two levers – government spending and taxation levels. The effects of fiscal policy can be limited by crowding out.  In expansionary policy, the extent to which government spending and tax cuts increase aggregate demand depends on spending and tax multipliers.  The tax multiplier is smaller than the spending multiplier. This is because the entire government spending increase goes towards increasing aggregate demand, but only a portion of the increased disposable income (resulting for lower taxes) is consumed.  The multiplier effect of a tax cut can be affected by the size of the tax cut, the marginal propensity to consume, as well as the crowding out effect. 13.4 KEYWORDS  Fiscal policy- Government policy that attempts to influence the direction of the economy through changes in government spending or taxes.  Multiplier- A ratio used to estimate total economic effect for a variety of economic activities.  Fiscal multiplier- The ratio of a change in national income to the change in government spending that causes it.  Tax multiplier- The change in aggregate demand caused by a change in taxation levels.  Automatic stabilizers - Because of the automatic effects of taxes on the economy, the economy responds less to changes in autonomous spending than in the case where taxes are independent of income. So output tends to vary less, and fiscal policy is called an automaticstabilizer.  Repo Rate - Repo rate refers to the rate at which commercial banks borrow money by selling their securities to the Central bank of our country i.e. Reserve Bank of India (RBI) to maintain liquidity, in case of shortage of funds or due to some statutory measures. It is one of the main tools of RBI to keep inflation under control.  Cash Reserve Ratio –Cash Reserve Ratio (CRR) is the share of a bank's total deposit that is mandated by the Reserve Bank of India (RBI) to be maintained with the latter as reserves in the form of liquid cash.  Reverse Repo Rate - Reverse Repo Rate is defined as the rate at which the Reserve Bank of India (RBI) borrows money from banks for the short term. The Reverse Repo Rate helps the RBI get money from the banks when it needs. 228 CU IDOL SELF LEARNING MATERIAL (SLM)

13.5 LEARNING ACTIVITY 1. Give reason on why there is a rise in petrol rates in India? Which measure can be taken to curb this rate? ___________________________________________________________________________ ___________________________________________________________________________ 2. Discuss how government fight inflation? ___________________________________________________________________________ ___________________________________________________________________________ 13.6 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define fiscal policy. 2. What is cash reserve ratio? 3. State the definition of automatic stabilizers. 4. Explain tax multiplier. 5. Define counter cyclical fiscal policy. Long Questions 1. Describe built-in fiscal policy. 2. Elucidate monetary policy. 3. Discuss fiscal policy. 4. List the types of fiscal policy. 5. What are the methods to control inflation? B. Multiple Choice Questions 1. What is the basis of measuring inflation? a. Wholesale price index b. Consumer price index c. Marshall’s index d. All of these 2. What is the term for increase in price due to increase in factor prices? 229 a. Demand pull inflation CU IDOL SELF LEARNING MATERIAL (SLM)

b. Cost pull inflation c. Stagflation d. None of these 3. Which is the most effective quantitative method to control inflation in the economy? a. Bank rate policy b. Selective credit control c. Cash reserve ratio d. Bank rate policy and Selective credit control 4. Who of the following suffer the most from inflation? a. Debtor b. Creditors c. Businessmen d. Holders of real estate 5. What is the cause of demand pull inflation? a. Increased money inflation b. Increased cost of inflation c. Increased money inflation and cost d. None of these Answers 1-b, 2-b, 3-c, 4- b, 5-c 13.7 REFERENCES References  George Reisman (1990). Capitalism: A Treatise on Economics. Ottawa: Jameson Books.  Mishkin, Frederic S. (1995). The Economics of Money, Banking, and Financial Markets. New York: Harper Collins.  Baumol, William J. and Alan S. Blinder (2006). Macroeconomics: Principles and Policy(10th ed.). Thomson South-Western.  Ambler, C.A., and Mesenbourgh, T.L. (1992), EDI-Reporting Standard for the Future. Washington, D.C.: U.S. Department of Commerce. 230 CU IDOL SELF LEARNING MATERIAL (SLM)

Textbooks  Kenton, Will (2020). Why Core Inflation is Important. Investopedia  Broda, C., Limão, N. and Weinstein, D. (2006). Optimal tariffs: the evidence. Washington, DC: National Bureau of Economic Research.  Brown, W. (1950). The United States and the Restoration of World Trade. Washington, DC: The Brookings Institutions.  Bierman, Jr., Johnson, L. and Peterson, D. (1991). Hedge Accounting: An Exploratory Study of the Underlying Issues. Norwalk, Conn.: Financial Accounting Foundation. Websites  https://www.yourarticlelibrary.com/macro-economics/inflation-macro- economics/controlling-inflation-3-important-measures-to-control-inflation/31093  https://www.economicsdiscussion.net/inflation/measures-for-controlling-inflation- with-diagram/4075  https://www.cnbc.com/2021/06/03/why-inflation-is-both-good-and-bad-for-your- wallet.html  https://www.tutorialspoint.com/managerial_economics/inflation_and_control_measu res.html 231 CU IDOL SELF LEARNING MATERIAL (SLM)