a The common expression for inflation is Too much money chas

(a). The common expression for inflation is \"Too much money chasing too few goods\". What type of inflation does this expression signify? Explain with examples.

(b). What is the other type of inflation? Explain with examples.

Solution

a) The type of inflation this expression signifies is \" Demand-Pull inflation\" . This type of inflation situation is one in which the supply of money increases at a rate much faster than the supply of real output. The supply of money increases because of the creation of too much credit by the banking system and also through government spending financed by borrowing from Central Bank .

Example of Demand-Pull Inflation : A rise in government\'s spending accompanied by either borrowing from central bank, printing new notes, huge rise in consumer\'s spending due to growing population pressure in the economy etc.

b) The other type of inflation is the \" Cost - Push Inflation \" . This is an inflation caused by the supply side of the economy. Rising general price level due to rise in the cost of production is know as cost-push inflation. Production cost may rise due to rise in the cost of raw materials, rise in wage bill, rise in capital cost etc. A rise in the cost of production raies the price level and if this price rise happens in a continuous fashion, it is known as cost-push inflation.

Example : Any rise in the cost of production is a potential source of cost - push inflation like a rise in the cost of raw materials , wage bill , transport cost etc.