inflation

Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole.

What causes Inflation on a whole ?

>The supply of money goes up.
>The supply of other goods goes down.
>Demand for money goes down.
>Demand for other goods goes up.

• Inflation at 11.44 percent for week ending 4th october 2008

IN addition over dependence on imported stuff without matching export revenues can also contribute.

Hi,

Basically inflation takes place due to a concept known as ''Psychological Law of Consumption''. It means that if liquidity circulating in the economy is high then propensity to consume of consumers increases at a higher pace. So demand for goods also increases. However supply of goods doesnot increase with that pace. This results in more demand and supply situation thus resulting into general price rise and inflation sets in. The measures to overcome the sutuation include sell of bonds/ treasury bills by RBI in openmarket which are basically Open Market Operations or even an increase in CRR as a result of which liquidity with banks reduces and interest rates go up. Inflation results in reduced purchasing power of money.