Classical Theory of Inflation says that money is the asset which is utilized by people to purchase goods and services on a regular basis. Money is the mode of exchange in every economy at the present day. Inflation occurs in an economy when the overall price level increases and the demand of goods and services increases.
There is another aspect of inflation which is coined as hyperinflation. Hyperinflation is another form of inflation which occurs when the price rates increase extraordinarily. The price rates reach an all time high like exceeding 50% per month when an economy is grasped by the phenomenon of hyperinflation. A good instance of such an inflation occurred in 1920 in Germany when their economy shot up to an extraordinary height. Germany experienced a hyperinflation during that period.
Determinant of Theory of Inflation
The classical theory of inflation owes its genesis to certain factors. Inflation is determined by the quantity theory of money. This theory which is contained in the classical theory of inflation is employed to explain the most important and long run determinants of inflation rate and price level. Inflation is a phenomenon which takes the whole economy into its grasp. It spreads across the whole of the economy. It is such a phenomenon which impacts the whole of the economy and is concerned about the value of the mode of exchange in an economy that is, it concerns itself with money. With the rise in the supply of money the price rate rises and the value of money falls that is devaluation of money takes place.
The supply of money is controlled by the FED through a policy of open market. Open market is a powerful tool of controlling the supply of money. The demand of money actually depends on a lot of factors. These factors include interest rates, average level of prices in the economy. Every economy endeavors to reach an equilibrium where the demand and supply of the money becomes equal.
There have been five important developments today, but price action has been mostly limited. Confirmation that the Reserve Bank of New Zealand is pausing after hiking rates for the fourth consecutive time has sent the New Zealand dollar sharply lower. The disappointing UK retail sales report has spurred an extension of the profit-taking seen in sterling in recent days. Sterling made a marginal new low for the month as it tested the $1.70 level. Despite other developments, the other major currencies are little changed.
Professor of Economics & Director of the Earth Institute at Columbia University. Special Adviser to the UN Secretary-General on the Millennium Development Goals. Founder & co-President of the Millennium Promise Alliance.
CEO and co-CIO of PIMCO. Served as President and CEO of the Harvard Management Company for 2 years, while also working at the IMF for 15 years. In 2008, his book "When Markets Collide", won the Financial Times award for Business Book of The Year in addition to being named as the one of the best business books of all time by The Independent.
Mario I. Blejer is a former governor of the Central Bank of Argentina and former Director of the Center for Central Banking Studies at the Bank of England. Eduardo Levy Yeyati is Professor of Economics at Universidad Torcuato Di Tella and Senior Fellow at The Brookings Institution.
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Vice President and Director of the Global Economy and Development Program at the Brookings Institution. Former Turkish Minister of State for Economic Affairs. Head of the United Nations Development Program (UNDP) from 2005-2009.