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OCTOBER 25, 2012

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A persistent increase in the general level of prices. It can be seen as a devaluing of the worth of money.



Several accounts of the causes of inflation are popular. The most popular are that


A. it is caused by excess demand (demand-pull inflation)


B. it is caused by high costs (cost-push inflation) or


C. excessive increase in money supply (monetarism)



Though seemingly distinct, they often mean the same thing. The mechanism by which the greater money supply causes inflation is by creating excess demand, making monetarism in agreement with demand-pull. The demand-pull and cost-push theories are also linked. Excess demand causes producers to raise prices, but the workers also demand higher wages to maintain their lifestyles, causing higher demand and the process begins again.



Inflation can be cured only by a measure that suppresses these attempts at maintaining living standards. Allowing inflation to develop can create the risk of rates high enough to disrupt the dynamics of economic life.






'Underground', 'black' or 'popular' economic activity which avoids taxes and government regulations.  As per a 2009 OECD report, the share of the informal sector worldwide ranges between 10 and 50 % of the GDP. Its share in developed economies is generally less than 20 % but is considerably higher in developing countries.



The firms in the sector remain small, having no incentive to grow and, therefore, lack innovation and the benefits of economies of scale. The resulting loss of taxes increases the tax burden on the formal, organized economy. A study on black money in India done by the National Institute of Public Finance and Policy pegs the black money at close to 50 % of the GDP.






The money market in which banks borrow or lend among themselves for fixed periods to tide over short-term liquidity problems. The interest rate at which the funds are offered to banks is called the Inter-Bank Offered Rate or, in London, the London Inter-Bank Offered Rate (LIBOR). In Mumbai, the rate offered for loans among banks in such a market is called the MIBOR.



The corresponding rate for deposits is known as the inter-bank market bid rate.






A financial intermediary which helps companies raising capital in stock exchanges by underwriting (“insuring”) their share issues. Merchant bankers also advise on mergers and deal in securities. 






The Quran, the holy Islamic scripture, is the main basis of Islamic law (sharia), which forbids usury and the borrowing or lending of money at interest. It is, however, acceptable for Islamic banks to share profits and losses with depositors and borrowers, where they share the risks. Sharia-compliant bonds may also be issued where the 'interest’ paid varies with the profits or losses of the issuer.






A high-yield, fixed-interest security of low quality having a low credit rating, below “investment grade”. The chances of repayment of principal and interest by the issuer in time are pretty low.



Junk bonds were pioneered in the US in the mid -1970s, though other bonds may fall to junk bond status when their rating worsens. Loosely speaking, they are toxic assets and having them in your portfolio can be dangerous for financial health.






A form of production management, originating in Japan, in which companies do not obtain stocks until actually needed. Traditionally, companies used to keep large quantities of parts ready for production. Just-in-time management can hold up the production process if a certain part is short but it also exposes which parts of the process are going wrong often. Besides, it lowers the costs of maintaining the stocks.


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