Inflation and its causes - 71023

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Inflation is a global Phenomenon which is associated with high price causes decline in the value for money. It exists when the amount of money in the country is in excess of the physical volume of goods and services. Explain the reasons for this monetary phenomenon.

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Inflation is commonly understood as a situation of substantial and rapid increase in the level of prices and consequent deterioration in the value of money over a period of time. It refers to the average rise in the general level of prices and fall in the value of money. Inflation is statistically measured in terms of percentage increase in the price index, as a rate per unit of time-usually a year or a month. Wholesale price index number is used to measure inflation, consumer price index or the cost of living index is also used to measure the same.

Percentage rate of inflation, P[t] =change in price[t]/ price[t-1]  * 100

Where change in price[t]=P[t]-P[t-1]

P= price level

[t], [t-1] = periods of calendar time in which the observations are made.

The causes for inflation:

I) Increase in aggregative effective demand causes inflation. Reasons for increase in demand are-