Inflation and Money Supply: Banking Awareness Notes

Mentor for Bank Exams
Dear Readers,
Welcome to Banking awareness material section. Here I am providing the important notes on Inflation and Money Supply as a part of banking awareness notes. This will definitely helpful for you upcoming exams and it will be much helpful for those who cleared the written exam and preparing for interview!!!  
Inflation and Money Supply:-
Price level in an economy is determined by the available goods and services and purchasing power or money supply available with the public
When there is a general rise in the price level in relation to a given level of available goods and services, it is called inflation. It could be due to Demand Pull or Cost Push conditions
A high level of inflation can have negative effects like instability in real value of money, discouragement to savings and investment and shortage of goods affecting the quality of life of poorer sections of the economy against the welfare objectives of the government
A low level inflation is good for developing countries like India to stimulate growth, income and employment in tune with a growing population
Deflation is the opposite of inflation a situation of decline in general price levels and occurs when the inflation rate falls below 0% (or it is negative inflation rate). Deflation can occur owing to reduction in the supply of money or credit and also due to direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation often leads to increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy.
Stagflation refers to economic condition where economic growth is very slow or stagnant and prices are rising. There is an increase in unemployment- accompanied by a rise in prices, or inflation.
In India inflation is mainly measured on a year to year basis and by changes in the important indices WPI and CPI.
WPI is prepared by Economic Advisor to GOI and DIPP under Ministry of Commerce on a weekly, monthly (weekly and monthly being provisional) and bimonthly (authentic) mainly by collecting data from manufacturing corporates and firms. The three major groups Primary Articles, Fuel & Power and Manufactured Goods have respective weights of 20%, 15% and 65% in the index. When all the three components are included it is called Headline Inflation and when only manufactured goods are included it is called Core Inflation. WPI is mainly used for trade, Fiscal and other economic policy purposes.