Tuesday, 21 March 2017
ESSAY ON "INFLATION : ITS CAUSES AND SOLUTIONS"
Collective increase in the supply of money, in money incomes, or in prices refers to inflation. Inflation is generally thought of as an undue rise in the general level of prices.
It can be stated as;
“Inflation is a situation whereby there is a continuous and persistent rise in the general price level.”
The major cause of increase in the price level is an increase in money supply. It may be due to increase in currency or credit money. Increase in the stock of money induces people to demand more and more of goods and services. According to the Fisher’s Quantity Theory of Money, if there is an increase in the velocity of circulation of money it also leads to inflation. Investments also play an important role in producing inflation. At the moment of investment the economy’s stock of wealth and money expands and it results in inflation. Government of Pakistan has to make a lot of non-productive expenditures like defense etc. Such unproductive expenditures lead to the wastage of economy’s precious resources and also lead to inflation. Corruption and black money leads to increase in aggregate demand, which is cause of inflation. These evils increase aggregate demand and import volume. Deficit financing is another cause of inflation. It increases the money supply and leads to inflation. Increase in foreign remittances is increasing the money supply in our country. Increase in money supply leads to inflation. Foreign aids are also a source of mobilization of resources form rich countries to poor countries. It is also a cause of inflation in Pakistan.Due to demonstration effect people of our country want to copy the styles of people of rich countries. In this way there is an increase in consumption trends that leads to inflation.Population of Pakistan is increasing day by day. Increasing population is demanding more and it creates inflation.
One popular method of controlling inflation is through 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.
There are three main ways to carry out a contractionary policy. The first is to increase interest rates through the Federal Reserve. The Federal Reserve rate is the rate at which banks borrow money from the government, but, in order to make money, they must lend it at higher rates. So, when the Federal Reserve increases its interest rate, banks have no choice but to increase their rates as well.The second method is to increase reserve requirements on the amount of money banks are legally required to keep on hand to cover withdraws. The more money banks are required to hold back, the less they have to lend to consumers.The third method is to directly or indirectly reduce the money supply by enacting policies that encourage reduction of the money supply.
Inflation is everywhere in an economy. Its rate is high in developing countries and is low in poor developed counties. Effective operation of monetary and fiscal policy is essential to control the inflation.
Meaning:Inflation refers to a situation when the there is an increase in the prices of general goods and services resulting in the overall decline in the purchasing value of money.
During the last one decade prices have soared continuously. In the last five years or so the prices of essential commodities have started rising at a galloping pace.
Main Causes of Inflation: There are many other factors which are also responsible for the economic crisis called Inflation.
- The greedy capitalists created artificial shortages in the country. They hoarded the good and later on sold these at high prices. The black-marketers and the smugglers also had a good time.
- As a result prices of essential commodities like rice, wheat, edible oil textiles, salt, sugar, coal, petrol etc. have gone so high that it is beyond the capacity of the poor and the middle-class people to purchase them.
- Moreover, the Government distribution system is not perfect. The rural poor are left to the mercy of the dishonest traders.
- Lastly, as there is no organized consumer resistance, the prices are rising day by day due to inflation that should be checked immediately.
Measures to control Inflation: The measures for controlling inflation are discussed below in points:
- Increase in interest rate is an important measure to control Inflation.
- To check the rise in price the Government should not only build up an adequate stock of food grains but also maintain a public distribution system throughout the country.
- Increase in production of industrial goods and agricultural crops.
- To set up industrial growth and production, sick industries should be revived and industrial disputes should be settled.
- The supply of essential items at subsidized and fixed rate throughout the country should be arranged.
- It should take firm steps to prevent traders to indulge in hoarding of essential commodities.
Category: Economy of India