Control on Money Supply. The central bank being the note issuing authority enjoys full powers to control the money supply injected through excessive credit creation. For the purpose it applies different instruments to control it. The instruments by which the central hank controls the money supply rate.
Following are the causes of inflation Increase in quantity of money, government expenditures & consumer's disposable income, oil prices, deficit financing, decline in production, devaluation in currency, increase in population, black money, excessive profit
By inflation we mean rising of prices but on the other hand it is also a reduction in the value of money. The reduction in the value of money affects the entire economy. When the price level tends upward the investment attitude flourish among the businessmen with the aim to earn more profit.
The concept of deflation is opposite to inflation. It is defined as a situation when the general income level and price level are falling. It is also known as negative inflation. During deflation the income level falls against the available supply of goods and services.
The only motive of business is to earn profit. However, there is always a possibility of suffering loss in it. This chance of loss from unpredictable events and situations in business in named as business risk.
The main causes of business risk are as under: Natural factors, Competition, Change in demand for the proudct, Use of modern technology, Human causes, Government policiies, Mismanagement
In a two sector economy where there are firms and personals doing certain kind of economic transaction between each other the equilibrium occurs where C + I equals S + C or aggregate demand of the economy equals the aggregate supply of the economy.
Define Stagflation through Diagram, In stagflation both the higher level of employment and inflation are attached. It is therefore, also called “Inflationary recession.” According to Keynesian stagflation occurs due to rise in cost of production or fall of supply. If the supply goes downward it will certainly affect the price level which will go higher.