Average level of prices nominal income price increases

1. Most people associate inflation with _______ on goods and services.

2. Inflation is an increase in the _______, not a change in any specific price.

3. A decline in average prices – _______ – occurs when price decreases on some goods and services outweigh price increases on all others.

4. _______ is the price of one good in comparison with the price of other goods.

5. _______ is the amount of money you receive in a particular time period; it is measured in current dollars.

6. _______, by contrast, is the purchasing power of that money as measured by the quantity of goods and services your dollars will buy.

7. Money illusion is the use of nominal dollars rather than real dollars to gauge changes in one's _______ or wealth.

IV. Read and translate the text:

Most people associate inflation with price increases on specific goods and services. The economy is not necessarily experiencing an inflation, however, every time the price of a cup of coffee goes up. We must be careful to distinguish the phenomenon of inflation from price increases for specific goods. Inflation is an increase in the average level of prices, not a change in any specific price.

We first determine the average price of all output – the average price level – then look for changes in that average. A rise in the average price is referred to asinflation.

The average price level may fall as well as rise. A decline in average prices – a deflation – occurs when price decreases on some goods and services outweigh price increases on all others. Relative price is the price of one good in comparison with the price of other goods.

Because inflation and deflation are measured in terms of average price levels, it is possible for individual prices to rise or fall continuously without changing the average price level. Nominal income is the amount of money you receive in a particular time period; it is measured in current dollars. Real income, by contrast, is the purchasing power of that money, as measured by the quantity of goods and services your dollars will buy. If the number of dollars you receive every year is always the same, your nominal income doesn't change – but your real income will rise or fall with price changes.

There are two basic lessons about inflation to be learned:

- Not all prices rise at the same rate during an inflation.

- Typically, some prices rise very rapidly, others only modestly, and still others not at all.

- Not everyone suffers equally from inflation. Those people who consume the goods and services that are rising faster in price bear a greater burden of inflation; their real incomes fall more. Other consumers bear a lesser burden, or even none at all, depending on how fast the prices rise for the goods they enjoy.

Money illusion is the use of nominal dollars rather than real dollars to gauge changes in one's income or wealth.

The most common measure of inflation is the Consumer Price Index (CPI – індекс споживчих цін). As its name suggests, the CPI is a mechanism for measuring changes in the average price of consumer goods and services.

Inflation Rate is the annual rate of increase in the average price level.

Price stability is the absence of significant changes in the average price level; officially defined as a rate of inflation of less than 3 percent. Our goal of «full» employment is defined as the lowest rate of unemployment consistent with stable prices.

The most familiar form of inflation is called demand-pull inflation. Demand-pull inflation is an increase in the price level initiated by excessive aggregate demand. The name suggests that demand is pulling the price level. If the demand for goods and services rises faster than production, there simply won't be enough goods and services to go around.

Cost-push inflation is an increase in the price level initiated by an increase in the cost of production. In 1979, for example, the Organization of Petroleum Exporting Countries (OPEC – Організація країн-експортерів нафти) sharply increased the price of oil. For domestic producers, this action meant a significant increase in the cost of producing goods and services. Accordingly, domestic producers could no longer afford to sell goods at prevailing prices. They had to raise prices. The result was a cost-push inflation.

V. Answer the following questions:

1. What is inflation?

2. What is deflation?

3. What is referred to as inflation?

4. What do we call the price of one good in comparison with the price of other goods?

5. What is the influence of price changes on your nominal and real income?

6. What are the two basic lessons about inflation?

7. What phenomenon do economists call money illusion?

8. What phenomenon do we observe when speculative profits become too easy?

9. What is the most common measure of inflation?

10. How can we calculate the inflation rate?

11. What do we call the absence of significant changes in the average price level?

12. What do we observe when the demand for goods and services increases faster than production?

VI. Define the terms:

inflation rate

cost-push inflation

deflation

money illusion

demand-pull inflation

inflation

price stability

Consumer Price Index

real income

nominal income

VII. Translate into English:

1. Явище інфляції треба відрізняти від підвищення цін на окремі товари. 2. Впродовж останнього місяця Інфляція на споживчі товари зросла на 5 відсотків. 3. Відносна ціна – це ціна одного товару в порівнянні з ціною інших товарів. 4. Інфляція найчастіше має місце в країнах із нестабільною економікою. 5. Номінальний доход – це кількість грошей, які ви отримаєте за певний період. 6. Він досліджує проблеми інфляції у цій країні вже протягом двох років. 7. Не всі ціни підвищуються однаково під час інфляції: деякі зростають дуже швидко, інші – помірно, а деякі зовсім не змінюються. 8. Темп інфляції – це щорічний середній темп підвищення рівня цін.

VIII. Read and dramatize the following dialogue: