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1. Quantity Theory of Money This refers to the identical or equal relationship between
national income estimated at market prices and the velocity of circulation of the money supply. Based on thistheory, there is a positive relationship between price levelsand the money supply.
This relationship is presented using the quantity equation (MV=PY) which was observed previously underthe study on money supply.
2.Keynesian Theory According to Keynes an increase in general price levels or
inflation is created by an increase in the aggregatedemand which is over and above the increase in
aggregate supply.
If a given economy is at its full employment output level,an increase in government expenditure (G), an increase
in private consumption (C) and an increase in privateinvestment (I) will create an increase in aggregatedemand; Leading towards an increase in general pricelevels.
The monetarists theory states that when the money supply is increased in order to grow or increase production andemployment, creating an inflationary situation within aneconomy.
A monetarist believes increases in the money supply willonly influence or increase production and employmentlevels in the short run and not in the long run. Accordingly,
there will be a positive relationship between inflationlevels and money supply. The monetarists explain thisrelationship using the theory of natural rate of unemployment.
4.Structuralism This theory states that the main reason for inflation is thein-elasticity in the structures of the economy.
This theory is mainly used to explain the nature and basis
of inflation in developing countries.This theory states thatthe inflation rates in developing countries are affected by the in-elasticity of the following reasons.
1. Adverse effect on production: Inflationleads to the economic recession in many sectors
of the economy.For Example: Prices of certain important articleof consumption such as cotton textile increasedto very high level resulting in the reduction of
its demand. With the decline in demandproduction too declines.
2. Inflation and labour productivity : One of themajor consequences of inflation is that it is marked
with the labour unrest.
3. The private corporate sector especially the capitalintensive ones,worry about the effects of strikes ontheir profit record and their ability to raise capital inthe future