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value of money

The document discusses the value of money, emphasizing its purchasing power and the relationship between money supply and price levels through the Quantity Theory of Money. It defines inflation as a rise in the general price level of goods and services, detailing its types: demand-pull and cost-push inflation, along with their causes. Additionally, it outlines measures to control inflation through fiscal and monetary policies, and briefly explains deflation as the decrease in prices and increase in purchasing power.

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9 views

value of money

The document discusses the value of money, emphasizing its purchasing power and the relationship between money supply and price levels through the Quantity Theory of Money. It defines inflation as a rise in the general price level of goods and services, detailing its types: demand-pull and cost-push inflation, along with their causes. Additionally, it outlines measures to control inflation through fiscal and monetary policies, and briefly explains deflation as the decrease in prices and increase in purchasing power.

Uploaded by

yikajol842
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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VALUE OF MONEY

• Value of money means the purchasing power and capacity


to exchange the goods and services. It refers to the
strength of money in the market against which we can buy
or sell something.
Quantity Theory of Money
• Is a relationship between the money supply and the price
level. Any change in the money creates an exactly
proportionate change in the price level.
• If the quantity of money is doubled, the price level will
also be double
INFLATION
Definition of Inflation

 Inflation is a Rise in the General Price .


Level of goods and services in an
economy over a period of time.
 In a broad sense , inflation is that state
in which the prices of goods and
services rise on the one hand and
value of the money falls on the
other .
Types of Inflation

Demand pull Inflation Cost Push Inflation


• Any inflation that results from an • Any inflation that results from a
increase in demand is called demand- decrease in supply is called cost-push
pull inflation inflation.

• Caused by • Caused by
– Increased Incomes – Increased costs of raw materials
– Decreased income taxes – Increased Wages
– Increased optimism about the future – Failure to replace capital goods as they age,
– Decreased tendency to save reducing its productivity, or increasing
– Consumers expect prices to rise in the future its maintenance costs
– More money in the economy – Falling Productivity of workers
1) Demand pull inflation

• It is a situation where the aggregate demand


persistently exceeds the available supply of output,
which causes the general price level to go up.

• Aggregate demand is greater than aggregate supply


so prices increase. This is called inflation
Causes of Demand Pull Inflation

The following are the main causes of demand-pull


inflation:
• 1 Consumption
• 2 Exchange Rate
• 3 Government Spending
• 4 Expectations
• 5 Monetary Growth
2) Cost-push inflation

• It is a situation where a rise in the


general price level is initiated and
sustained by rising cost due to which
prices go up.

• For example, when the cost of raw


material goes up, then the price of goods
also go up which leads to inflation
Causes of Cost-Push Inflation:

• 1 Increase in Cost of Raw Materials


• 2 Increase in wage rates
• 3 Imported inflation
• 4 Indirect taxes
Measures to
Control
Inflation

Fiscal Monetary
Measures Measures
Monetary Measures
A policy adopted by the central bank to manage the
money supply and money demand in the country is
known as Monetary Policy.

How Monetary Policy is used to control inflation?

• 1 Central Bank reduces the money supply by selling


bonds etc.

• 2 The central bank rises its interest rate for the


commercial banks.
Fiscal Measures

It is the policy made by govt.to manage the public


revenue and public expenditure.

How fiscal policy is used to control inflation?

1 Govt. can reduce public expenditure

2 Government rises the direct taxes to discourage the


consumption thus aggregate demand for goods falls
and inflation is controlled.
Deflation
• Deflation is when consumer and asset prices decrease
over time, and purchasing power increases.
Essentially, you can buy more goods or services tomorrow
with the same amount of money you have today. This is
the mirror image of inflation, which is the gradual
increase in prices across the economy.

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