Inflation

Inflation refers to a situation where there is a continuous and persistent rise in general price level in a country. Inflation erodes the real value of money. It lead to a fall in purchasing power. Rs. 100 (nominal value) under an inflation rate of 10% is worth less than Rs. 100.

Real value is: 

Consider the Fisher’s equation of:

MV = PT

Where, M:   is the money

             V: income velocity of circulation (i.e. average no. of times each £ changes hands) 

             P:   General Price level or inflation rate

             T:   no. of transaction or goods supplied

MV represents the demand-pull factors.

PT represents the cost push factors.

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