Dear Readers,
Welcome to Banking
awareness material section. Here I am providing the important notes on Inflation
and Money Supply as a part of banking awareness notes. This
will definitely helpful for you upcoming exams and it will be much helpful
for those who cleared the written exam and preparing for
interview!!!
Inflation and Money
Supply:-
Price level in an economy
is determined by the available goods and services and purchasing power or money
supply available with the public
When there is a general
rise in the price level in relation to a given level of available goods and
services, it is called inflation. It could be due to Demand
Pull or Cost Push conditions
A high level of inflation
can have negative effects like instability in real value of money,
discouragement to savings and investment and shortage of goods affecting the
quality of life of poorer sections of the economy against the welfare
objectives of the government
A low level inflation is
good for developing countries like India to stimulate growth, income and
employment in tune with a growing population
Deflation is the opposite of inflation a
situation of decline in general price levels and occurs when the inflation rate
falls below 0% (or it is negative inflation rate). Deflation can occur owing to
reduction in the supply of money or credit and also due to direct contractions
in spending, either in the form of a reduction in government spending, personal
spending or investment spending. Deflation often leads to increasing
unemployment in an economy, since the process often leads to a lower level of
demand in the economy.
Stagflation refers to economic condition where
economic growth is very slow or stagnant and prices are rising. There is an
increase in unemployment- accompanied by a rise in prices, or inflation.
In India inflation is
mainly measured on a year to year basis and by changes in the important indices WPI and CPI.
WPI is prepared by Economic Advisor to
GOI and DIPP under Ministry of Commerce on a weekly, monthly (weekly and
monthly being provisional) and bimonthly (authentic) mainly by collecting data
from manufacturing corporates and firms. The three major groups Primary
Articles, Fuel & Power and Manufactured Goods have respective weights of
20%, 15% and 65% in the index. When all the three components are included it is
called Headline Inflation and when only manufactured goods are
included it is called Core Inflation. WPI is mainly used for
trade, Fiscal and other economic policy purposes.
