Inflation is a galloping rise in prices as a result of the excessive increase in the quantity of money. It is destroying disease born out of
Lack of monetary control whose results undermined the rules of business, creating havoc in markets and financial ruin of even the prudent. This was the Quantity Theory approach of inflation which says that with the increase in money supply prices increase and results in inflation. But according to Keynes, there being underemployment in the economy, an increase in money supply leads to increase in aggregate demand, output and employment. As these increase further, diminishing returns start and certain bottlenecks appear and prices start rising. This process continues till the full employment level is reached. If the money supply increases beyond the full employment level, output ceases to rise and prices rise in proportion with the money supply. This is true inflation according to Keynes.
Lack of monetary control whose results undermined the rules of business, creating havoc in markets and financial ruin of even the prudent. This was the Quantity Theory approach of inflation which says that with the increase in money supply prices increase and results in inflation. But according to Keynes, there being underemployment in the economy, an increase in money supply leads to increase in aggregate demand, output and employment. As these increase further, diminishing returns start and certain bottlenecks appear and prices start rising. This process continues till the full employment level is reached. If the money supply increases beyond the full employment level, output ceases to rise and prices rise in proportion with the money supply. This is true inflation according to Keynes.
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| INFLATION |
Inflationary gap is the excess of planned expenditure over the available output at pre-inflation or base prices. According to Lipsey, 'The inflationary gap is the amount by which aggregate expenditure would exceed aggregate output at the full employment level of incòme. The larger the aggregate expenditure, the larger the gap and the more rapid the inflation. Given a constant average propensity to save, rising money incomes at full employment level would lead to an excess of demand over supply and to a consequent inflationary gap. Thus Keynes used the concept of the inflationary gap to show the main determinants that cause an inflationary rise of prices.
Suppose the gross national product at pre-inflation prices is Rs. 200 crores. of this 80 crores is spent by the Government Thus 120 crores worth of output is available to the public for consumption at pre-inflation prices. But the gross national income at current prices at full employment level is Rs. 250 crores and the govt. taxes away Rs. 60 crores leaving away Rs. 190 crores as disposable income. Thus Rs. 190 crores is the amount to be spent on the available output worth Rs. 120 crores, thereby creating an inflationary gap of Rs. 70 crores.
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