– INFLATION –
Inflation has attracted more public interest than any other aspect of economics, for the simple reason that everyone finds himself immediately affected by it. The common belief is that inflation is necessarily a negative occurrence but there are various reasons why this might not be the case. Let us consider some of the arguments. Simply described, inflation is the situation where increased wage demands result in higher prices of consumer goods, which causes further increased wage demands.
This is called an inflation spiral. The following example will make this point clear. The workers in the car industry demand and receive a wage increase. This causes producers to increase the market price of cars in order to make a profit. People see that they cannot so easily afford to buy cars and, as a result, they ask for higher wages in order to maintain the same standard of living as before. These new wage increases result in rising prices for goods and services in all sectors of the economy.
Car industry workers now face higher prices so they demand higher wages. A side effect of this spiral is that workers in other industries may ask for similar increases before any price rises occur, simply because they feel that they, too, should have more money. The general effects of inflation can be discussed according to whether they are largely positive or largely negative.
The positive effects will be considered first and may be divided into two main groups: effects on prices and wages and effects on loans. The consumer discovers he has to pay more for goods and services although he can find himself better off than other groups of workers if his wages increase faster than theirs. In this way, income gaps between low-paid and high-paid workers can be narrowed by allowing low-paid workers to have a larger increase. Everybody gets a rise, but some receive more than others. Obviously, if all wages are increased by the same percentage as prices in general, no change in standard of living takes place.
The effect of inflation on loans is beneficial to the borrower. In other words, loans reduce in value so that a borrower only has to pay back the nominal value of the loan and not its true, or real, value. This benefits the borrower, as the following example shows. A student borrows £10,000 to study medicine and become a doctor. This is the amount that a qualified doctor earns in 1 1/2 years. When the student pays back the loan six years later, £10,000 is the equivalent of only nine months’ salary. Even if normal interest rates are added to the 40 loan, this will not significantly change the final result.
A. What do the following refer to?
1. ‘they’ (line 18): 2. ‘they’ (line 21):
3. ‘he’ (line 25):
B. Mark the best choice.
1. What is the function of this text?
a) To explain the causes and effects of inflation.
b) To persuade the reader to do something about inflation.
c) To inform how much the workers in car industry suffer from inflation.
d) To explain why inflation has only negative effects.
2. Inflation attracts so much interest because .
a) all people are affected by inflation at once
b) there is a common belief that inflation is a negative occurrence
c) several reasons contribute to the increase in inflation
d) higher prices of consumer goods are due to high wage demands
3. Which of the following is the main idea of the second paragraph?
a) People cannot easily afford to buy cars during times of inflation.
b) During a period of inflation, workers in the car industry might demand a wage increase.
c) The relationship between increasing prices and wages is an inflation spiral.
d) Car manufacturers have to increase the price of their product because of inflation.
4. Which of the following is emphasized most in the fourth paragraph?
a) A doctor earns 210,000 in 1 1/2 years.
b) It is an advantage to borrow in times of inflation.
c) It costs £10,000 to study to be a doctor.
d) Normal interest rates are added to borrowed money.