Question

a)What are the sources of inflation? How would you illustrate them graphically?

b)Explain the difference between deflation and disinflation. Analyze the impact on an economy of a prolonged period of deflation.

Answer 1

a) There are meainly two sources of inflation and they are demand-pull inflation and the cost-push inflation. The demand pull inflation is due to the rise in the demand for the goods and services so there will be a rise in the prices of goods and services. The cost push inflation is due to the rise in the prices of inputs used for the production of gooods and services. So this leads to reduction in the production of goods and services and ultimately results in a rise in price level.

b). The deflation is a situation where the falling of prices and it is just the opposite of inflation and disinflation is a different concept that denotes the rate of change. The disinflation is the slow down in the rate of inflation. The prolonged period of deflation results in a decrease in the spending and this would result in a decrease in investment. And finally lead to higher unemployment and economic downturn.