The major cause of increase in the price level is an increase in money supply. It may be due to increase in currency or credit money. Increase in the stock of money induces people to demand more and more of goods and services. According to the Fisher’s Quantity Theory of Money, if there is an increase in the velocity of circulation of money it also leads to inflation. Investments also play an important role in producing inflation. At the moment of investment the economy’s stock of wealth and money expands and it results in inflation. Government of Pakistan has to make a lot of non-productive expenditures like defense etc. Such unproductive expenditures lead to the wastage of economy’s precious resources and also lead to inflation. Corruption and black money leads to increase in aggregate demand, which is cause of inflation. These evils increase aggregate demand and import volume. Deficit financing is another cause of inflation.
It increases the money supply and leads to inflation. Increase in foreign remittances is increasing the money supply in our country. Increase in money supply leads to inflation. Foreign aids are also a source of mobilization of resources form rich countries to poor countries. It is also a cause of inflation in Pakistan.Due to demonstration effect people of our country want to copy the styles of people of rich countries. In this way there is an increase in consumption trends that leads to inflation.Population of Pakistan is increasing day by day. Increasing population is demanding more and it creates inflation.The Federal Reserve rate is the rate at which banks borrow money from the government, but, in order to make money, they must lend it at higher rates. So, when the Federal Reserve increases its interest rate, banks have no choice but to increase their rates as well.The second method is to increase reserve requirements on the amount of money banks are legally required to keep on hand to cover withdraws.
It increases the money supply and leads to inflation. Increase in foreign remittances is increasing the money supply in our country. Increase in money supply leads to inflation. Foreign aids are also a source of mobilization of resources form rich countries to poor countries. It is also a cause of inflation in Pakistan.Due to demonstration effect people of our country want to copy the styles of people of rich countries. In this way there is an increase in consumption trends that leads to inflation.Population of Pakistan is increasing day by day. Increasing population is demanding more and it creates inflation.The Federal Reserve rate is the rate at which banks borrow money from the government, but, in order to make money, they must lend it at higher rates. So, when the Federal Reserve increases its interest rate, banks have no choice but to increase their rates as well.The second method is to increase reserve requirements on the amount of money banks are legally required to keep on hand to cover withdraws.
