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An increase in the general level of prices in an economy that is sustained over a period of time is called inflation. Inflation plays a major role in an economy. Inflation is a major concern of the governments world over. The effect of inflation on the economy is widespread in its reach, ranging from redistribution of income and wealth among different sections of the society to the worsening of balance of payments position.
- The inflation may be demand-pull or cost-push. A demand-pull inflation refers to increase in price level due to increased or excess demand. Cost-push inflation refers to rise in general level of prices due to increased cost of production.
- The Phillips curve shows the relationship between inflation and unemployment. When tracing the link between rate of change in wages and unemployment over nearly a century for the United Kingdom, Phillips discovered an inverse relationship.
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