It can be stated that Inflation is the rise in prices of products as a result of the increase in the quantity of money. This definition however would be inefficient since for two reasons; 1. If we simply term inflation to be a rise in prices of certain products then we will be mistaken because prices might be rising in one sector of the economy yet falling in another sector. 2. We have to take into account that the process may be high this month but generally fall the following month Mudida in his book Modern economics (2009:433) gives a better definition, he defines inflation as the persistent rise in general price levels. Hardwick on the other end gives specifics; he states that for inflation to occur price levels must be rising continuously and over a long period of time. Introduction to modern economics (1999:569) All never the less flutter around one idea, that inflation is a rise in prices, and this rise must be consistent.
TYPES OF INFLATION
These are generally classified under two broad categories
* Demand pull-inflation and
* Cost push-inflation
This type results when there’s excess aggregate demand in an economy that is close to full employment. Let us assume that the aggregate supply is fixed and that the economy has fully employed its resources and there is full employment. When money supply increases, the demand for more goods increases, considering our economy is now maximally utilizing its resources, and there is full employment. There is nothing that can be done to increase the production. What we experience therefore is an increase in demand un countered with an increase in supply. The economy therefore experiences an excess demand. The increase in demand therefore inevitably leads to an increase in price levels of goods and services. According to Jinghan, in his book, Principles of economics ( 2004:576) the effect thus experienced is in accordance with Keynesians theory on demand-pull...
Bibliography: Lipsey, R. G. and K.A. Chrystal. 2007. Economics 11th Edition. New York: Oxford University Press.
Jhingam, M.L. 2004.Principles of Economics 2nd Edition. Delhi: Nisha Enterprises
Mudida R. 2009.Modern Economics 2nd Edition. Nairobi: Focus Publishers Ltd
Hardwick P. ET al.1999.An Introduction to Modern Economics 5th Edition. London: Pearson Education Ltd
Please join StudyMode to read the full document