Comprehension. a. an increase in the general price level

Ex. 1. Chose the correct answer.

1. Inflation is:

a. an increase in the general price level.

b. not a concern during war.

c. a result of high unemployment.

d. an increase in the relative price level.

2. Inflation is measured by an increase in:

a. homes, autos and basic resources.

b. prices of all products in the economy.

c. the consumer price index.

d. none of the above.

3. The consumer price index (CPI):

a. adjusts for changes in product quality.

b. includes separate market baskets of goods and services for both base and current years.

c. includes only goods and services bought by the typical consumer.

d. uses current year quantities of goods and services.

4. Deflation is a (an)

a. increase in most prices.

b. decrease in the general price level.

c. situation that has never occurred in U.S. history.

d decrease in the inflation rate.

5. Suppose a typical automobile tire cost $50 in the base year and had a useful life of 40,000 miles. Ten years later, the typical automobile tire cost $75 and had a useful life of 75,000 miles. If no adjustment is made for mileage, the CPI would:

a. underestimate inflation between the two years.

b. overestimate inflation between the two years.

c. accurately measure inflation between the two years.

d. not measure inflation in this case.

Ex. 2. Say whether the following is true or false.

1. Inflation occurs when there is an increase in the purchasing power of money.

2. Unlike the GDP deflator, the CPI does not consider goods and services purchased by business and government.

3. Disinflation and deflation mean a decrease in the average price level.

4. A consumer price index of 110 for a given year indicates that prices in that year are 10 per cent higher than prices in the base year.

5. People with fixed income tend to fare best in an inflationary period.

Ex. 3. Use the text to answer the questions:

1. Do prices in the times of inflation rise in all markets equally?

2. What is the boundary between inflation and deflation?

3. What is the price level and what is it measured by?

4. How do they define the inflation rate?

5. What do they call the situation when the money real purchasing power increases?

6. What category of people is most heavily hurt by inflation?

7. What measures can be taken to protect lenders from inflation?

8. After World War II, a 12-ounce bottle of Pepsi sold for 5 cents. Nowadays, a 12-ounce can of Pepsi sells for more than 10 times that much. Can this serve as an example of inflation?

9. Consider this statement: “When the price of a good or service rises, the inflation rate rises”. Do you agree or disagree? Explain.

Text 2

While reading the text pay attention to the difference between demand-pull inflation and cost-push inflation.