PPT: Inflation - Notes | Study Indian Economy for UPSC CSE - UPSC

 Page 1


Lecture 3 
Inflation
Prelims 2020 Crash Course 
Capstone IAS Learning
Page 2


Lecture 3 
Inflation
Prelims 2020 Crash Course 
Capstone IAS Learning
What will we cover
Concept of Inflation 
Causes of Inflation 
Concept of Real interest rate and Real wages 
Various terms associated with inflation 
Phillips Curve 
Measures of Inflation(CPI, WPI, PPI etc.) 
Impact of Inflation
Page 3


Lecture 3 
Inflation
Prelims 2020 Crash Course 
Capstone IAS Learning
What will we cover
Concept of Inflation 
Causes of Inflation 
Concept of Real interest rate and Real wages 
Various terms associated with inflation 
Phillips Curve 
Measures of Inflation(CPI, WPI, PPI etc.) 
Impact of Inflation
Concept of Inflation
A rise in general level of prices is called Inflation. 
An increase in the general level of prices in an 
economy that is sustained over a period of time is 
called Inflation. 
The main causes of inflation are either excess 
aggregate demand or cost push/supply shock factors. 
Deflation - When the general level of prices are falling 
over a period of time. 
Disinflation - It is the decrease in the rate of inflation 
or a slowdown in rate of increase in general price 
levels of goods and services over a period of time.
Page 4


Lecture 3 
Inflation
Prelims 2020 Crash Course 
Capstone IAS Learning
What will we cover
Concept of Inflation 
Causes of Inflation 
Concept of Real interest rate and Real wages 
Various terms associated with inflation 
Phillips Curve 
Measures of Inflation(CPI, WPI, PPI etc.) 
Impact of Inflation
Concept of Inflation
A rise in general level of prices is called Inflation. 
An increase in the general level of prices in an 
economy that is sustained over a period of time is 
called Inflation. 
The main causes of inflation are either excess 
aggregate demand or cost push/supply shock factors. 
Deflation - When the general level of prices are falling 
over a period of time. 
Disinflation - It is the decrease in the rate of inflation 
or a slowdown in rate of increase in general price 
levels of goods and services over a period of time.
Causes of Inflation 
Demand Pull 
This happens when aggregate 
demand outstrips aggregate supply. 
Examples : 
-
A growing economy 
-
Over Expansion of money supply 
-
Government cutting direct tax 
rates 
-
Growth in wages 
-
Higher inflationary expectations 
-
Etc.
Cost Push or Supply Shock 
This happens when there is 
disruption in supply or increase in 
cost of production. 
Examples : 
-
Rising wages 
-
Increase in price of raw materials  
-
Higher indirect tax(or various 
government regulations) 
-
Depreciation of currency 
-
Natural disasters that disrupt 
supply 
-
Deliberate cut in supply(OPEC) 
-
Etc.
Page 5


Lecture 3 
Inflation
Prelims 2020 Crash Course 
Capstone IAS Learning
What will we cover
Concept of Inflation 
Causes of Inflation 
Concept of Real interest rate and Real wages 
Various terms associated with inflation 
Phillips Curve 
Measures of Inflation(CPI, WPI, PPI etc.) 
Impact of Inflation
Concept of Inflation
A rise in general level of prices is called Inflation. 
An increase in the general level of prices in an 
economy that is sustained over a period of time is 
called Inflation. 
The main causes of inflation are either excess 
aggregate demand or cost push/supply shock factors. 
Deflation - When the general level of prices are falling 
over a period of time. 
Disinflation - It is the decrease in the rate of inflation 
or a slowdown in rate of increase in general price 
levels of goods and services over a period of time.
Causes of Inflation 
Demand Pull 
This happens when aggregate 
demand outstrips aggregate supply. 
Examples : 
-
A growing economy 
-
Over Expansion of money supply 
-
Government cutting direct tax 
rates 
-
Growth in wages 
-
Higher inflationary expectations 
-
Etc.
Cost Push or Supply Shock 
This happens when there is 
disruption in supply or increase in 
cost of production. 
Examples : 
-
Rising wages 
-
Increase in price of raw materials  
-
Higher indirect tax(or various 
government regulations) 
-
Depreciation of currency 
-
Natural disasters that disrupt 
supply 
-
Deliberate cut in supply(OPEC) 
-
Etc.
Wage-Price Spiral
It is a macroeconomic theory that explains the cause and effect 
relation between rising wages and inflation. It is a vicious cycle in 
which wages increase, causing prices to increase, which in turn 
creates demand for higher wages.
Higher Inflation
Demand for 
Higher wages
Cost-Push factors