Demand-Pull and Cost-Push Inflation

Text 2

Comprehension

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.

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

Inflation can occur for several reasons, and economists usually distinguish between two basic types of inflation, depending on whether it originates from the buyers' or the sellers' side of the market.

Perhaps the most familiar type of inflation is called demand-pull inflation, which is a rise in the general price level resulting from an excess of total spending (demand). Demand-pull inflation occurs when aggregate demand in the economy increases faster than the economy's productive capacity.

If demand exceeds aggregate supply, the average prices of goods and services are pulled up by the “excess” demand. Demand-pull inflation is often expressed as “too much money chasing too few goods.” When sellers are unable to supply all the goods and services buyers demand, sellers respond by raising prices. In short, the general price level in the economy is “pulled up” by the pressure from buyers' total expenditures.

This type of inflation is usually associated with conditions of full employment. If there are unemployed resources available, an increase in demand can be met by bringing these resources into employment. Supply will increase and the increase in demand will have little or no effect on the general price level. If the total demand for goods and services continues to increase, a full employment situation will eventually be reached and no further increases in output is possible (e.g. in the short run). Once the nation's resources are fully employed, an increase in demand must lead to an upward movement of prices. A situation of excess demand may arise when a country is trying to achieve an export surplus, in order, perhaps, to pay off some overseas debts. Exports are inflationary because they generate income at home but reduce home supplies. Demand inflation may develop when, with full employment, a country tries to increase its rate of economic growth.

Another possible cause of inflation under conditions of full employment is an expansion of government spending financed by borrowing from the banking system.

Cost-push inflation is an increase in the general price level resulting from an increase in the cost of production. Most sellers try to push these higher costs on into higher prices even if there is no change in aggregate demand in the economy.

One source of cost-push inflation is supply shocks, such as widespread and severe crop failures, the sharp increases in the price of oil instituted by a cartel, etc. The effect of a supply shock is to raise the level of input prices above the level that firms had expected.

Another possible source of cost-push inflation is the momentum of inflationary expectations generated by previous demand-pull inflation.

The influence of expectations on both demand-pull and cost-push inflation is also an important consideration.

Ex. 1 Match the following collocations with their Russian equivalents. Use them in the sentences of your own.

A	B
1) инфляция, вызванная превышением спроса над предложением (инфляция спроса) 2) инфляция, обусловленная ростом издержек (инфляция издержек) 3) избыток совокупных расходов (спроса) 4) инфляционные ожидания 5) рост цен 6) совокупные расходы 7) шоки предложения 8) расширение расходов правительства 9) общий уровень цен 10) избыточный спрос	a) an excess of total spending (demand)   b) total expenditures c) the general price level d) excess demand e) an expansion of government spending f) supply shocks g) a rise in prices h) demand-pull inflation i) cost-push inflation j) inflationary expectations

Ex. 2. Choose the correct answer.

1. Demand-pull inflation is caused by:

a. monopoly power;

b. energy cost increases;

c. tax increases;

d. full employment.

2. Demand-pull inflation occurs:

a. when ‘too much money is chasing too many goods’;

b. during a recession;

c. rising production costs;

d. none of the above.

3. Cost-push inflation is due to:

a. excess total spending;

b. too much money chasing too few goods;

c. resource cost increases;

d. the economy operating at full employment.

Ex. 3. Say whether the following is true or false.

1. Demand-pull inflation occurs when aggregate demand in the economy increases faster than the economy's productive capacity.

2. Demand-pull inflationary pressure increases as the economy approaches full employment.

3. Cost- push inflation is caused by too much money chasing for few goods.

4. Expectations do not have any influence on demand-pull and cost-push inflation.

Ex. 4. Expand the sentences.

1. The text deals with ….

2. Demand-pull inflation is associated ….

3. Cost-push inflation occurs when ….

4. The possible sources of cost-push inflation are ….

5. Supply shocks are caused by ….

Дата добавления: 2014-11-16