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Short Notes On Reflation and Disinflation

Short Notes on stagflation, Reflation and Disinflation

 In today world of economics, you must understand these terms Reflation and Disinflation 

A planned inflation is called reflation. It may be defined in the following words “inflation deliberately undertaken to relieve a depression”.

This measure is taken to expand aggregate demand in order to restore full employment levels of national income. A policy of reflation is acted upon by

  • Increasing supply of money
  • Lowering rate of interest

Increase in government expenditures

(iv) Reduction in taxes all these policy measures help to increase prices in a controlled manner. The increase in prices results in more profits and thus encouraging more production in the economy.

This idea gained popularity during the great depression of 1929-1933 which badly affected the economies of almost all the capitalistic countries of the world. Production income, employment and economic activities fell to minimum level. Governments were anxious to increase income, production and employment In order to stimulate recovery central bank increased supply of money faster than the rate of growth of output in the economy. This helped to raise prices at par with the costs. By this process generalized inflation was induced without any general excess demand.

(2) Disinflation

Decrease in inflation due to decisions and measures of authorities are called dis-inflation.

As inflation is a common fact in capitalistic economies therefore all governments have been planning means end ways to curb inflation without disturbing employment.

The term, dis-inflation has become very popular among the modern economists. As in free market economies prices of the commodities are going up, it causes many financial problems to people with fixed incomes. Rising prices are also a matter of concern for domestic and foreign investment. During the periods of inflation people lose confidence in the money as a store of value. In such situation every govt, tries to bring the prices of commodities down to a reasonable level. Following fiscal and monetary measures are usually taken to reduce the general price level.

  • Reduction in government expenditures
  • Increase in taxes on selected luxury item
  • Tight monetary policy i.e measures are taken to control the supply of money.

The process through which prices are brought down without causing unemployment is called ‘dis-inflation’.

You Must Know The Difference Between Reflation And Disinflation ,stagflation for Economy.

(3) Stagflation

Stagflation refers to a situation in which inflation and unemployment exist together in the economy. Theoretically inflation and unemployment are two major problems of the economy but only one of the two can exist in the economy. It means that during the periods of unemployment inflation is reduced to

The minimum level where as if there is inflation in the economy it kills unemployment.

Sometimes it happens that there is inflation as well as unemployment in the economy, this is a complex situation and is called stagflation.

The dangerous situation of stagflation is usually due to the problem of cost push inflation. When cost of production increases in the economy it causes the prices level to increases. The increasing cost of production reduces the profit margins for the producer and consequently they cut down production. This results in unemployment along with inflation in the economy.

Following may be the other causes of stagflation

  • when during the high inflation government tries to control its expenditures, it reduces aggregate demand and hence causes unemployment.
  • When there is hyper inflation ( very high inflation)in the economy it causes uncertainty, investors are afraid of the security of their capital therefore the volume of investment starts decreasing in the economy which results in undesirable ‘situation .The situation of stagflation is highly undesirable for any economy. There is no single remedy to come

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