Q.
b) Define inflation and explain the different degrees of inflation. (8 marks)
(8 marks, 2013 Q5b)
A.
Inflation is associated with rising price. It is a situation in which there is a sustained, inordinate (excessive), and general increase in prices. There is a continuous fall in the value of money as there is too much money chasing after too few goods. The increase in prices must last for a reasonable period of time. If prices go up during this period and fall in the next, then it is mere price fluctuation. The increase in price must be excessive by that country's experience. Inflation is the rise in average price of all goods that we buy and not just of one item.
Inflation may be classified according to the rate of increase in prices. The 'rate of inflation' is the percentage increase in the Retail Price Index (RPI) over the period of one year.
There are different degrees of inflation. It includes mild inflation, strato-inflation and hyper-inflation.
Mild inflation is a slow rise in price level of no more than 5 percent per annum. It is associated with a low level of unemployment and is during the upswing phase of a trade cycle. Such creeping inflation has beneficial effects on an economy. It is a sign of a buoyant economy or an expanding economy, implying the generation of jobs, output and growth.
For strato-inflation, the inflation rate ranges from about 10 percent to several hundred per cent. Many developing countries particularly those in Latin America experienced this.
Hyper-inflation is a very rapidly accelerating inflation which is also know as runaway inflation or galloping inflation. This usually leads to the breakdown of the country's monetary system as the existing currency may have to be withdrawn and a new one introduced. In 1923, the inflation rate in Germany averaged 322 percent per month with the highest inflation rate at 29 000 percent in October. Hyper-inflation usually occurs during or soon after a war when a government turns to the printing press to create money to pay its debts. It is usually short-lived and should not be regarded as typical of inflation.
Ref:
Jia Hao Chang August 19, 2006, Financial Realm Types of Inflation - Mild Inflation, Strato-Inflation and Hyper-Inflation, view 15 Nov, 2014 available at http://searchwarp.com/swa87474.htm