Describe the various causes of inflation.

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Inflation is caused by either forces leading to increase in demand of goods and supply or factors that lead to decrease in in supply of goods and services.
Factors causing increase in demand
• Black money. Black money is always spent on conspicuous spending while raising the aggregate demand and hence the price levels rises.
• Increase in money supply. Increase in money supply increasing the money income which in turn increases the demand for goods and services.
• Paying off debts. When the government pays off its old debts to the public it results in an increase of purchasing power with the public. This will be used to buy more goods and services for consumption purposes thus increasing the aggregate demand in the economy.
• An increase in government expenditure as a result of the outbreak of war development and welfare activities causes an increase in the aggregate demand for goods and services in the economy.
• Increase in population. A rapid increase in population leads to an increase of demand of goods and services. This leads to an inflationary rise in prices due to excessive demand.
• Reduction in taxation. When a government reduces taxes, it increases the disposable income of the people which in turn raises the demand of goods and services.
• Increase in exports. When the foreign demand for domestically produced increases, it raises the earning of exporting industries. This in turn will increase demand for goods and services within the economy.
Factors leading to a decrease in supply
• Scarcity of factors of production. Scarcity of factors of production like raw materials, labor leads to reduction of production of goods and services for consumption hence rising the price levels.
• Trade union activities. Trade unions often leads to stoppage of work during the strikes leading to decline in production thereby leading to increase in price levels.
• Natural calamities. Floods and droughts affects the supply of products and raise their prices.
• Law of diminishing returns. This law operates when production is increased by employing more and more variable factors with fixed factors and given technology. As a result of this law, the cost per unit of production increases, thus leading to rise in the price levels.
• International causes. A major cause of inflation on most countries is the international rise in prices of basic materials e.g. petrol used in almost all the industrial materials.

skilled writter answered the question on May 1, 2018 at 16:21

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Describe the various causes of inflation.

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