Causes of Inflation

Written By Fathimath Sama on Saturday, 22 June 2013 | 23:57

Following are the factors which cause an increase in the size of demand: 

1. Increase in Public Expenditure: 

An increase in public expenditure, consequent upon the outbreak of war or development planning, invariably, causes an increase in the demand for goods and services in the economy. Infact, this is an important cause giving rise to the emergence of excess demand in the country. 

2. Increase in Private Expenditure: 

An increase in private expenditure, both consumption and expenditure as well as investment expenditure is an important cause of the emergence of excess demand in the economy. When business conditions are good, private entrepreneurs start investing more and more funds in new business enterprises, giving rise to an increase in the demand for the services of factors of production. This results in an increase in factor-prices. When factor incomes increases there is more and more expenditure on consumption goods. The ultimate effect of an increase in private expenditure is to push up the demand for commodities as well as factors of production.
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