WEEK 3
ECONOMICS
TERM 3 e-LEARNING NOTE
YEAR 11
TOPIC: INFLATION
DURATION: 45 MINS
PREVIOUS KNOWLEDGE: Student have been exposed to
Financial Institutions
LEARNING OBJECTIVES: At the end of the lesson students
should be
able to
Define and list the types of Inflation
Mention and explain the causes of
Inflation
Define and mention the causes of
Deflation
List and explain the terminologies
associated with Inflation
TEACHING/LEARNING STRATEGIES: Direct teaching, pair
work,
students’ presentation
KEY VOCABULARY: Inflation, Deflation, Inflationary gap
CONTENT:
Meaning, Types, Causes of Inflation
Effects and Controls
Deflation, Meaning and Causes
Effects and Controls
Terminologies Associated with Inflation
TOPIC:
INFLATION
This is a persistent rise in the general level of price of goods and
services. Inflation occurs when there is an increase in money
supply without corresponding increase in volume of production.
TYPES OF INFLATION
Demand-Pull Inflation
Cost-Push Inflation
Hyper-Inflation
Creeping Inflation
Demand-Pull Inflation:
This occurs when there is excess demand for goods and services
over the supply. The factors responsible for this type of inflation
may be due to population increase, increase in workers' salaries
and wages, etc.
Cost-Push Inflation:
Producers pay for factors of production, any slight increase in
price of factor input will reflect in the price per unit. For example:
if there is an increase in price of flour, sugar, butter,
automatically the price of bread would be high.
Hyper-Inflation:
This occurs when the prices of goods and services are rising fast
to come and explore our modern store to discover the latest
product innovations. The extent that money is losing its value or
its ability to buy goods. War, budget deficits, etc. are the major
causes of hyperinflation. Hyperinflation is also known as
galloping inflation or run-away inflation.
Creeping Inflation:
This type of inflation occurs when there is slow but steady rise in
the general prices of goods and services. It is also known as
persistent inflation
CAUSES OF INFLATION
Inflation occurs when there is excess demand for goods and
services e.g. demand-pull inflation.
Low productivity e.g. agriculture which maybe as a result of over-
flooding
Increase in salaries and wages of public servants
High cost of production which may be cause due to increase in
materials used in production
Budget deficit i.e. when government expenditure is more than its
income.
Inflation can also be caused if there is increase in population that
will force
demand to rise.
Excessive bank lending.
High cost of importing raw material can lead to high cost of
goods.
Hoarding - which is an act of creating artificial scarcity.
Inflation can be caused due to workers’ industrial action such
strike, peace rallies, tools down
Poor storage facilities.
Money laundering — which is mass transfer and injection of
money into
circulation.
EFFECTS OF INFLATION
Inflation as a phenomenon is a necessary evil. In other word, it
has positive and negative effects in the overall economy.
POSITIVE EFFECTS OF INFLATION
During inflation, the debtor gains at the expense of the creditor.
Inflation period serves as a period where businessmen make
profit.
Inflation stimulates investment.
Employment rate is high during inflation.
Due to the second, third and fourth points stated above, inflation
helps the
economy to grow.
NEGATIVE EFFECTS OF INFLATION
The lenders (creditors) incur loss because the money loses its
value as inflation persists.
Distortion in the economy due to agitation for increase in wages
and salaries.
Fixed income earners e.g. salary earners suffer a lot during
inflation.
Money loses its value during inflation.
It leads to balance of payment problems.
Inflation discourages savings since money loses its value day in
day out.
Fall in living standard of the people.
HOW TO CONTROL INFLATION
In an attempt to stem inflation, the government should
encourage industrialization to make goods and services
available.
Where inflation is triggered by increase in money supply,
effective interest rate could be adopted i.e. increasing the
interest rate to discourage excess borrowing.
Effective use of fiscal policy e.g. Taxation as a way of reducing
the disposable income of workers can help to check inflation.
Removal of bottlenecks in the distribution system. This will
enhance free flow of goods.
Legislation could be put in place to check the activities of
hoarders.
Contractionary monetary policy can also help to check inflation
where inflation is caused by increase in money supply.
Subsidies for farmers, business, etc. will help in solving the
problem of increase in the prices of inputs e.g. hoe, cutlass.
Wage freezing i.e. government should not increase salaries.
TERMINOLOGIES ASSOCIATED WITH INFLATION
INFLATION GAP: This is an economic situation in which the total
demand in the economy exceeds the total supply of goods and
services available to satisfy demand. To arrive at this, subtract
the total amount of money available for spending from the total
money value of the actual good and services available to meet
the demand.
INFLATION SPIRAL: An increase in price will make workers to
demand for an increase income (wages and salaries). This will
cause a rise in general level of price. This is known as inflation
spiral.
DISINFLATION: The direct control of consumers’ expenditure as
a way of checking inflation is known as disinflation. This is done
by reducing the supply of money and increasing interest rates
etc.
REFLATION: This refers to economic state of affairs in which
prices, employment, output etc. is picking up again as a result of
conscious government policy to that effect.
STAGFLATION: When high rate of inflation exists at the same
time as industrial production is slowing down, then we refer to
this as stagflation.
SLUMPFLATION: Slumpflation occurs when economic condition
in which much reduced economic activity co-exists with inflation.
DEFLATION
This is defined as a persistent fall in the general level of price.
This is a situation where the volume of money in circulation is
not sufficient to meet up with the prevalent economic situation.
This is a direct opposite of inflation. This is a fall in general level
of price as a result of decrease in the volume of money in
circulation.
CAUSES OF DEFLATION
Deflation is caused by failure of government to spend i.e. Budget
surplus.
When banks increase their interest rate, it discourages borrowing
as such money supply drops. This amounts to deflation.
Where the productivity exceeds the demand coupled with
decrease in money supply then deflation sets in.
Where workers are excessively taxed leaving them with little
disposable income, their marginal propensity to consume drops
thereby leading to deflation.
READING ASSIGNMENT
Amplified and Simplified Economics for SSS by Femi Longe page
196-204
WEEK 3
WEEKLY ASSESSMENT
MULTIPLE-CHOICE QUESTIONS
1. An inflation in which the price level rises steadily at an
average rate of
about 2% per annum is best described as
A. galloping
B. induced
C. creeping
D. suppressed
2. Inflation in any economy
A. has no monetary connection
B. implies a sustained increase in the general price
C. always increase the value of the national currency
D. tends to redistribute income
3. Which of the following statements is not true in an inflation
period
A. the purchasing power of money diminishes
B. wages rise simultaneously with price
C. more money runs after a limited quantity of goods
D. fixed income earners lose
4. Inflation caused by an increase in demand is known as
A. cost-push inflation
B. hyper-inflation
C. demand-pull inflation
D. creeping inflation
5. One way to solve the economic problem of inflation in a
country is by
increasing the
A. supply of commodities
B. supply of currency
C. salaries of workers
D. demand for commodities
THEORY
1. What is inflation? Discuss four ways of combating inflation.
2. State three positive effects and two negative effects of
inflation.
3. Describe the effects of inflation on the economy of a country.
4. What efforts has the government of Nigeria made to combat
inflation?
