What is Inflation?  And Types of Inflation.

Inflation means an increase in the general price level Increase in the general price level is called inflation Any commodities, any sector. If there is an increase in the commodity sector or services of the product, then you will not call it inflation Until a general increase in price level is noted.

there are two types of inflation. Number one is “Demand-pull inflation”   & Number two is “Cost-push inflation”

Demand-pull inflation

The model of aggregate demand and aggregate supply that we have seen in the previous lecture is our long-run aggregate supply this is short-run aggregate supply and this is aggregate demand This you have aggregate demand, aggregate short run, aggregate long run Now there are many factors of the demand.

If you are asked to control this inflation.

Aggregate demand, which has increased, should be brought back, controlled, and prices reduced, So we have seen 2 policies

• Fiscal policy
• Monetary policy

FISCAL POLICY

The component of fiscal policy you have is government expenditure and taxes And the components of monetary policy are money supply and interest rate So if you want to reduce the price level, you have to make such a policy to reduce the demand pull inflation So what will you reduce, reduce the government expenditure For example you started reducing On the other hand, you will increase the taxes In case of increase in taxes, the part of investment will decrease When it will decrease, the aggregate demand will start to shift leftward And will gradually decrease, however much you have to reduce the price you bring the policy to this extent And ultimate let it come here, let it suppose come here In the same way if such inflation has to be controlled So monetary policy can also be used to control this inflation Because the transmission mechanism that was seen in the monetary policy That ultimate effect used to affect aggregate demand So if you contractionary fiscal policy Like increasing taxes and reducing government expenditure will control this inflation.

MONETARY POLICY

In the same way contractionary monetary policy, you use contractionary monetary policy Reduces the money supply and increases the interest rate, in both conditions the share of investment will decrease When the investment decreases, the aggregate demand will start decreasing and it will come back and the ultimate will be reached here.

So we can use our monetary policy and fiscal policy to control demand pull inflation Well now we are going to discuss cost push inflation There are three important factors of cost pull inflation, see For what reason could that be?

1. Wages
2. profit margin

• WAGES

Because labor comes in wages This is one of the three factors that you can say can be the reason for the increase in cost

Now if for example, the demand for high wages will start When the demand for high wages starts, then we know that the aggregate supply shows the Minimum price at which firms are willing to supply The minimum price at which the firm can supply together. Is Willing to supply but if wages increase in labor, then their minimum price will increase.  When wages are increased, the minimum price will be increased It means their cost of production will increase Aggregate supply due to an increase in the cost of production will shift upward according to cost and leftward according to output This new curve has arrived. Now look here is the new intersection. It came to you p2

• Profit Margin

The same thing can be done if the profit margin is increased Producers increase their profit margin. As the profit margin increases, the price level of the market will increase as it has increased In the third case, if the price of the input is increases especially that which is fuel which is energy If the energy prices increase, we see that the whole economy is affected And an increase in the general price level is seen. So these are the three factors due to which the economy is facing cost-push inflation graphically you can see here that the increase in prices is visible due to an increase in cost and a decrease in supply So these were some factors that represent cost-push inflation Well, now we discuss the recovery policies of such cost-push inflation As we saw in demand that demand is pulling inflation So we have used fiscal policy, we have also implemented monetary policy. Ultimately we can control this demand by increasing and decreasing the demand Now we see that if there is cost-push inflation then how to control it in the market.

For example,

it we have a long run If now for example If you want to reduce the price, you know that contractionary monetary policy is applied to reduce the price We have seen in the previous lecture that the ultimate in aggregate demand will come If in this condition we reduce the aggregate demand So you can see aggregate demand if Because of the contractionary policy So you can see the demand curve will shift backward And ultimately it will reach here So see what the problem is, you reduce demand by using contractionary fiscal policy. Due to reducing the demand, the prices had increased and now they have brought it back to the place Now you can see the output in the economy has decreased This means that only one factor is controlled We could not control the output as we as were controlling it easily in the demand side In such a way if you use exponentially policy Aggregate demand will increase exponentially in policy, here it will be moved So what do you see in moving here that the output has increased When it decreased, the output increased again But at the same time, the price has increased further What this means is that whenever

Cost-Push Inflation 

this is a very important point whenever there is cost-push inflation, you cannot control this inflation from the demand side as we see that they will control on one factor, the output will be brought up, and then the price will increase further. If you control other factors, try to reduce the price, then the output will decrease further So that’s why there is a problem here, in which we try to control this cost-push inflation on the demand side, so the policies of the demand side are not effective to control the cost-push inflation So now there is another advance discussion of the same cost-push inflation And that is called Stagflation, We have seen about the any inflation Stagflation is a concept related to inflation. But there is a condition attached to it Prices are also increasing and at the same time unemployment is increasing So remember if you see these two conditions So these two conditions are not of inflation So this condition will be called stagflation Well, the concept of stagflation is very much related to cost-push inflation Because we saw, that That demand-pull inflation has been covered by our monetary fiscal policy But the cost-push inflation, is we have Which is monetary of fiscal policy because it is demand based, it is demand-side policy So it was not controlling our cost-push inflation So see for example which caused cost-push inflation Due to which the aggregate supply shifted backward Now here you see the new price level. Now see what the condition is When we reach this, from equilibrium1 to equilibrium2 what happens is the output has decreased, and due to this decrease in the production, the market will see the highest increase in unemployment So remember that cost-push inflation does not bring only inflation in the market It also invites recession with the rise in prices and when there is a recession, unemployment increases and when we see these two situations together So what do we call this inflation?  Its Stagflation.

Stagflation:

Stagflation Now due to this stagflation which was demand side policies In the case of stagflation it failed as we have already seen That if we apply monetary and fiscal policy in cost-push inflation either price control will be done or output control will be done Both are not controlling together So another school of thought came up for this what they introduce He said that the problem is that the increase in prices is due to the cost of output Policies are failing because you are increasing and decreasing all demand side policies Contractionary fiscal contractionary monetary expansionary fiscal expansionary monetary These are all demand-side tools Now if you apply it without focusing on supply, that demand-side policy will not work, which we have already seen. That demand side is not working in cost-push inflation So what to do work in such a condition, it was said that cost-effective policies should be made, How, use will be the same as monetary and fiscal policy but should be used from the supply side, for example:

If the cost is increasing for any reason due to electricity or energy prices you, monetary policy, and fiscal policy of tools are money supply and interest rate and government expenditure and taxes You should use these tools in those things due to which the cost is increasing It is happening due to energy shortage, you should implement such policies In which the interest rate will be less charged in the energy sector Taxes will be taken less Government should cover its expenses there, money supply should increase in this particular sector. What will happen with such a condition when you apply qualitative policies, particularly on these factors, Due to which the increase in cost is seen. So through these monetary and fiscal policies When you try to control the supply side So what will be the ultimate result, the supply curve has shifted backward due to which the price is increasing And you have increased the cost of production due to the shortage of the same things When it will be supplied in the market, you can see This supply curve will be shift rightward, supply will increase if excess increases in this sector Now see the output back here This is the same inflation cost-push But the control we have is on supply side instead of demand side So when we tried to control the supply side So look at the supply side, when the price has also been controlled and the output has also been controlled. So this means that cost-push inflation will be controlled from the supply side only then effective results will be seen otherwise results will not be seen effectively This school of thought The concept he introduced is supply-side economics Supply-side economics, This is a factor due to cost-push inflation if we control it from the supply side So we will be able to achieve the objective of our economy Means can bring the output to its place and control the price otherwise, if there is cost-push inflation and we apply demand-side policy to control it, then we cannot control this inflation. So the situation in which there is an increase in the price also increases unemployment What is that situation called, a special type of inflation is called STAGFLATION.

So I hope you have understood the discussion of types of inflation and stagflation and their appropriate policies.