Question

Explain four causes of inflation.

Answer 1

Four causes of inflation are as follows:

i. Public expenditure increases:
Spending by the Government is an important part of total spending in any modern economy. It is a total spending which determines a total demand. Thus, government expenditure is an important determinant of aggregate demand. In the less-developed countries, government expenditure has shown an upward trend. At the beginning of the planning period in India, the amount of government spending has increased by leaps and bounds. This has created an inflationary situation in the economy.
ii. Hoarding:
Excess demand is artificially created by hoarders. They stockpile the goods and do not release to the market for sale. It leads to excess demand and inflation in the economy.
iii. Genuine shortages:
Sometimes, the shortages may not be artificial but genuine. Due to some reason, the factors of production are limited in supply and production is affected. Because supply is less than demand, prices rise.
iv. Population growth:
The growth of population will increase the total demand in the market. If the supply of goods and services does not keep pace with demand, the pressure of excess demand will create inflation.