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Measures of Inflation: Price & Inflation Video Lecture | Indian Economy for UPSC CSE
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| 1. What is inflation? |  |
Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time. It is typically measured as an annual percentage change and is indicative of the decrease in purchasing power of a currency.
| 2. How is inflation measured? | |
Inflation is measured using various indices, such as the Consumer Price Index (CPI) or the Producer Price Index (PPI). These indices track the changes in the prices of a basket of goods and services over time. By comparing the current prices with a base year, the inflation rate can be calculated.
| 3. What causes inflation? | |
Inflation can be caused by various factors, including demand-pull inflation, cost-push inflation, and built-in inflation. Demand-pull inflation occurs when aggregate demand exceeds the available supply, leading to an increase in prices. Cost-push inflation, on the other hand, happens when businesses face higher production costs, such as wages or raw materials, and pass them on to consumers. Built-in inflation is a result of past inflation expectations influencing current wage or price negotiations.
| 4. What are the effects of inflation on the economy? | |
Inflation can have both positive and negative effects on an economy. Some of the negative effects include eroding the purchasing power of consumers, reducing real wages, and distorting resource allocation. However, moderate inflation can also stimulate economic growth by encouraging spending and investment. Central banks often aim to maintain a low and stable inflation rate to balance these effects.
| 5. How does inflation impact interest rates? | |
Inflation and interest rates are closely related. Generally, higher inflation leads to higher interest rates. This is because lenders require higher interest rates to compensate for the expected loss in purchasing power of the money they lend. Conversely, lower inflation rates allow for lower interest rates, as lenders do not need to account for as much inflation risk. Central banks often adjust interest rates in response to changes in inflation to maintain price stability.
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Nov 05, 2024 Last updated |
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