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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?