Download Self-Check (Units 1-3)

Self-Check (Units 1-3)
1. Discuss the following questions.
1) Why inflation is often called a "capricious" tax ?
2) Can you identify any groups of people who are particularly helped or hurt
by inflation? Explain.
3) Does an increase in the price level automatically lower society’s real
income? Explain.
4) Is it advantageous to borrow money if you expect prices to rise? Why?
2.Decide the following problem.
Between 2000 and 2001, the average household’s nominal income increased
from $25,000 to $30,000. The following table lists the prices of a small
market basket purchased in both of those years. Assuming that this basket of
goods is representative of all goods and services, compute the change in real
income between 2000 and 2001.
Item
Quantity
Price ( per unit)
2000
2001
Coffee
20 pounds
$3
$4
Tuition
1 year
4000
7000
Pizza
100 pizzas
8
10
VCR rental
75 days
15
10
Vacation
2 weeks
300
500
3. Complete the text by using the following words and answer the
questions.
assets
consumer
debts
deflation
excess
employment
hyperinflation
interest
producers restrictions
spending
supply
unemployment weighted
Inflation is a rise in the general level of prices. It is caused by an (1)
................................................................ of demand over supply,
and is related to an increase in the money (2)…………...Single-digit
inflation is usually described by economists as moderate inflation. Double
or triple-digit inflation, which some countries have survived for quite long
periods, is known as galloping inflation. Inflation of four or more digits, as
in Germany in the early 1920s, and Argentina in the early 1980s, is
known as (3)……………….
Prices in general tend to remain at the same anticipated level unless
there are demand-pull or cost-push shocks. If aggregate demand
exceeds what a country can produce at full (4)………. , prices will rise
{including wages, the price of labour): this is demand-pull inflation. But,
for the last fifty years, costs have pushed up prices and wages, even in
recessions and periods of high (5)………………..: this is cost-push
inflation. Cost-push inflation is caused, for example, when unions demand
wages that employers cannot afford or when oil (6)………………. are
able to raise their prices.
The opposite of inflation, when prices fall (generally for short periods), is
(7)…………..Government policies can be inflationary (often by
accident), disinflationary or reflationary. Disinflationary policies might be
aimed at slowing down price inflation or at reducing imports; they involve
reducing demand by raising taxation and/or cutting government
(8)………………..Reflationary policies, on the contrary, involve
revitalizing a sluggish economy by increasing consumer demand, either by
cutting taxes or raising benefits, or relaxing monetary and credit
(9)………………………
Inflation is measured by the retail price index (RPI) in Britain and the
(10) ....................................................................... price index (CPI) in the
US. These measure the cost of a 'basket' of goods and services, including
food, clothing, housing, fuel, transport and medical care. The individual
items in price indices are (11)………… ............. , meaning that allowance
is made for their relative importance in people's spending.
Unless inflation is both balanced (affecting all prices and costs equally)
and anticipated, it distorts relative prices, tax rates and real
(12)……………………. rates. Unexpected inflation tends to benefit
people with fixed nominal interest rate (13)………………..,and to
disadvantage creditors and people with fixed nominal interest rate
(14)………………….. or non-index-linked pensions.
1.What is the inflation rate in your country at present?
2.Can you give current examples of double and triple-digit inflation?
3.What is your government's policy at the moment? Does it seem to be
more concerned with price stability or with reducing unemployment?