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Economic Theories

Inflation, Deflation and Reflation

Inflation is a global phenomenon. There is hardly any country in the capitalist world, which is not afflicted by the spectre of inflation. Inflation is a sizeable and a rapid increase in the general price level. A small increase in the general price level is not regarded inflationary in strict economic sense. Moreover, inflation is not always bad. An increase in the general price levels in the midst of depression is not inflationary, as it doesn�t have any harmful consequences for the economy. Thus, inflation is the state of disequilibria in which an expansion of purchasing power tends to cause or is the effect of an increase of the price level.

There are two approaches to the theory of inflation, namely,
  • The Quantity Theory of Money Approach, and
  • The Excess Demand Approach
The Quantity theory of money approach suggests that it�s the increase in the quantity of money that causes an inflationary rise in the price level. The Excess demand approach, on the other hand, suggests that inflation is a situation in which the total demand for goods exceeds the total supply of goods.

Deflation is the opposite of Inflation. Deflation is a state of disequilibria in which a contraction of purchasing power tends to cause, or is the effect of, a decline of the price level. It must be noted here that Deflation is different from Disinflation. Disinflation may be defined as the process of reversing inflation without creating unemployment or reducing the output in the economy. In fact, disinflation is a deliberate attempt to counter a highly inflationary situation.

Reflation may be defined as �inflation deliberately undertaken to relieve a depression�. In other words, reflation is a type of controlled inflation. When deflation is carried to an extreme limit and the prices of goods and services fall to extremely low levels, then the government may resort to reflation to protect the economy of the country from serious consequences.

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Economic Theories
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