Inflation, Deflation
and Stagflation
CH # 5
LOGO
Terms to know
1
2
3
4
Inflation, Sources of inflation and its Remedies
Deflation, Causes of deflation, Measure to
control deflation
Reflation and Disinflation
Stagflation, Causes of stagflation, Measure to
control stagflation
Deflation
 In the words of Prof. Crowther;
“Deflation is that state of the economy where the
value of money is rising or prices are falling.”
 If the general level of prices falls and as a
result thereof, the value of money increases,
it is called deflation in economics.
 Deflation is just the opposite of inflation.
LOGO
Causes of Deflation:
 Deflationary situation may occur due to the
following terms;
 Private investment
 Persistent unfavorable balance of payments
 Continued Govt.-budgetary surpluses
 Increase in the total output
 To rise the discount rate by the Central Bank
 By selling securities
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Measure to control deflation
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 Prof. J. M. Keynes are strongly of the view that
prices can be stabilized more by fiscal measures
than by monetary steps.
 The Govt. adopt the following methods to control
the deflation situation:





Increase public spending
Reducing taxes
Stimulating private investment
Private consumption
increase the living standard of the people
Reflation
LOGO
 Reflation is a state of a moderately rising
general prices when efforts are made by the
Govt. to lift the economy out of depression.
 This upward rising in general prices is
characterized by expanding production, rising
consumers expenditures, the usage of machinery
and increasing profit.
Disinflation
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 The process or methods through which prices are
brought down without causing unemployment
and reducing output.
 Disinflation occurs after the level of full
employment is reached in the economy.
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Diagram
 Diagrammatical representation:
Economic Activity
Inflation
Disinflation
Full Employment
Reflation
Deflation
Depression
Time (years)
Stagflation
LOGO
 In the words of Michael swan;
“Stagflation can be described as a contraction or
stagnation of a nation’s output accompanied by rise
in the price level.”
 Stagflation is a more serious problem than
inflation.
 When the economy is hit by declining output, it
depressed the economy of a whole country with
growing unemployment.
Causes of stagflation
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 According to the modern economists, the main
cause of stagflation is the reduction in aggregate
supply.
 The reduction in AS may be due to the following
factors;
 Reduction in Labor supply
 Increases in taxes
 Resources costs
LOGO
Causes of stagflation
 the phenomenon of stagflation is illustrated in the
following diagram:
AS
1
Cost/tax/wage
AS
P1
P
AD
L1 L
Employment
Measures to control of stagflation:
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 There are number of measures which can be adopted to slow
down the rise in the general price level and maintain the
general price level.
 The should make every effort that minimum wages are not
raised during stagflation.
 The increase in money wages should be linked with increase in
productivity.
 The personal and business taxes should be reduced to bring
down the costs of goods.
 The Govt. itself should take up development programs to create
jobs in the country
By M. Ihsan
End of Ch # 5