(a) “The rise in price level after the point of full employment is true inflation.” —JM. 

KEYNES— 

In simple words, inflation is a situation in which prices of goods and services constantly rise, at a fast pace. 

The cause of inflation are as follows: 

1. Increase in Population: Increase in population refers to increased demand of consumer goods which puts a pressure on existing supply of goods and service thus resulting in inflation. 

2. High Rate of Investment: The heavy investments made by the Government as well as private industrialists have resulted in continuous increase in the prices of capital goods and other items of production.

3. Increase in Income: With the increased income of the people, rises the demand for their goods and services and hence their prices also increases. 

4. Enhanced Taxation: With every year budget, the Government imposes fresh commodity taxes, where the tax payers can easily shift the tax. It leads to increase in prices of different commodities, which in turn push up their prices. 

(b) Quantitative Credit Control: Quantitative Credit control are traditional methods which aims at controlling the cost and quantity of credit. Quantitative credit control methods influence the availability of credit indiscriminately. Bank rate, open market operations, cash reserve and statutory liquidity ratio are the methods of Quantitative Credit Control. Quantitative Credit Control Measures of the Central Bank 

1. Open Market Operations: It refers to the purchase or sale of Govt, securities, public securities, etc. in an open market by the central bank. In case of inflation, central bank sells securities on which buyer’s draw cheques from their A/c’s which reduces the cash reserve of the commercial banks. This reduces the power to create credit thereby commercial banks have to reduce their advance and loans and vice-versa in case of deflation. 

2. Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR): 

Cash Reserve Ratio (CRR) refers to that percentage of total deposits of commercial bank which it has to keep with the RBI in the form of cash reserves. Statutory Liquidity Ratio (SLR) refers to that portion of the total deposits of commercial bank which it has to keep with itself in the form of cash reserves, gold and govt, securities. This is in addition to CRR. In case of inflation, the central bank increases the CRR and SLR which restricts the credit-granting capacity of the commercial banks and vice-versa in case of deflation.