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Inflation BY AYUSSH SANGHI Causes of Inflation - Part 4.4
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Causes of Inflation We have already discussed types of inflation on the basis of causeS: . Demand Pull Inflation Cost Push Inflation
Demand Pull Inflation Multiple factors are responsible for rise in the prices of goods and services. Demand Pull Inflation factors are those due to which there is an overall rise in the demand for goods and services in general. We are going to discuss causes of demand pull inflation.
Causes A. Deficit Financing and Increase in Monev Suppl Increasing government expenditure has to be financed through deficit financing. The alternatives are: raising money through loans or printing of fresh currency The above actions directly pushes up money supply . It increases purchasing power and breeds inflation without a corresponding rise in the supply of goods and services.
Causes B. Increasing Government Expenditure Government expenditure has been rising steadily over the years. . It implies a rising demand for goods and services as it has the effect of putting in large money income in the hands of the general public thereby rising their purchasing power and stoking the fire of inflation. . In India, it is the non plan expenditure, which is mainly responsible because most of the non - plan expenditure is non - productive and hence only adds to purchasing power and demand without adding to production Thus, too much money starts chasing too few goods
Causes C. Black Money Unaccounted or black money plays an important role in pushing up prices by pushing up demand through consumption In fact, estimations reveal black money to be close to 50 per cent of India's GDP and it has a major role in fuelling demand, thus, leading to rise in prices.
Gauses D. Population Pressure Growing population also pressurises the aggregate demand and in turn price level. India is a hugely populated country. Hence the Indian economy is affected due to pressure of population, which results in expansion of demand for goods and services in general and result in inflationary pressure if supply fails to match demand.
Causes E. Foreign Exchange Reserves Rise in foreign exchange reserves leads to corresponding increase in domestic money supply and fuels inflation. As more foreign exchange comes into the country, RBI has to create corresponding domestic money 19
Causes E. Rising Liquidity due to Public Finance Tools Excess liquidity created in the system; due to monetary and fiscal stimulus packages.