and services in the economy. vi) Deficit Financing: In order to meet its mounting expenses, the government resorts to deficit financing by borrowing from the public and even by printing more currency notes. This raises aggregate demand in relation to aggregate supply, thereby leading to inflationary rise in prices. vii) Black Assests, Activities and Money: The existence of black money and black assests due to corruption, tax evasion etc., increases the aggregate - - Monetary Economics demand.
People spend such money, lavishly. Black marketing and hoarding reduces the supply of goods. These trends tend to raise the price level further. viii) Repayment of Public Debt: Whenever the government repays its past internal debt to the public, it leads to increase in the money supply with the public.
This tends to raise the aggregate demand for goods and services. ix) Increase in Exports: When exports are encouraged, domestic supply of goods decline. So prices rise. .
. Effects of Inflation The effects of inflation can be classified into two heads: ( ) Effects on Production and ( ) Effects on Distribution. . Effects on Production: When the inflation is very moderate, it acts as an incentive to traders and producers.
This is particularly prior to full employment when resources are not fully utilized. The profit due to rising prices encourages and induces business class to increase their investments in production, leading to generation of employment and income. i) However, hyper-inflation results in a serious depreciation of the value of money and it discourages savings on the part of the public. ii) When the value of money undergoes considerable depreciation, this may even drain out the foreign capital already invested in the country.
iii) With reduced capital accumulation, the investment will suffer a serious set-back which may have an adverse effect on the volume of production in the country. This may discourage entrepreneurs and business men from taking business risk. iv) Inflation also leads to hoarding of essential goods both by the traders as well as the consumers and thus leading to still higher inflation rate. v) Inflation encourages investment in speculative