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Passage 5
(56) " Inflation" is the term used to describe a rise in the general price level of goods and services. Note that individual price increases, for example due to seasonal shortages of food,are not classified as inflation. There are three situations which can result in inflation.
The first is the one in which the demand for goods and services (and the money available to purchase them) exceeds the supply available. There may be a large supply of money availa-ble for one or more of several reasons: because government spending is relatively high ; or be-cause credit is easily available; or because people have relatively high disposable income ( e. g. incomes after tax plus transfers, such as children ' s allowances) . (57) When customers want to spend money on goods and services but there are not enough of them to satisfy the de-mand, prices rise accordingly. This is often referred to as demand-pull inflation" .
The second situation which causes inflation is the one in which production costs are rising. Production coses include raw materials, energy, and wages. When workers find they cannot. afford the goods and services they need owing to the fact that prices are too high, they seek wage increases. (58) Sometimes increased production costs are absorbed in increased productivity or a reduction in profits so that they are not passed on in higher prices.
More usually, however, they are not and, hence, prices rise. This is often referred as “cost-push inflation". These two causes of inflation are often interrelated so that the one situation leads to the other which in turn leads to a recurrence of the first situation. This chain of cause and effect is called an " inflationary spiral".
A third cause of inflation may be government policy. (59) Governments can affect the level of prices by controlling or regulating them, or by reducing taxes on goods and services and accordingly keeping prices down. Alternately, if a government does not regulate prices or if it imposes higher takes (such as VAT) it may push prices up. Governments also occasionally attempt to control the level of wage increases and, hence, keep those production costs down. Lastly, as mentioned earlier, some people think that higher prices are often due to nigh government spending.
Inflation has several consequences, all of which are bad.
(60) First, because the real value of money tends to decline, lenders of money, such as banks,are less willing to lend or are willing to do so only at higher interest rates. This makes borrowing more expensive, and thus may cause prices to rise even further, owing to the in-creased cost of borrowing. Second , there are many groups of people whose incomes axe fixed or whose incomes tend to rise slowly and infrequently. In a period of inflation the living standings of these people fall and, as a result, they suffer hardship. Old age pensioners are examples of one of these groups.
Third, when people see the value of money being eroded, they are less willing to save. Accordingly, there is less money available for investment in the new equipment which is fre-quently necessary if productivity is to increase. It may be more difficult, therefore, to absorb increased production costs. Consequently, prices continue to rise.
B. Choose the best answer to each of the following questions. (10%)
What is the best title of the passage?
A. Harmful Effects of Inflation
B. The Causes and Consequences of Inflation
C. The Inflationary Spiral
D. Factors Which Cause Inflation
What happens when supply fails to meet demand?
A.Prices go up.
B.Prices go down.
C.Prices remain the same.
D.The government is Lo regulate prices.
what does the sentence "credit is easily available" in line 4, paragraph 2 mean?
A. Credit cards can be used everywhere.
B. It is easy to get loans or buy things on credit
C. Consumers have got a better reputation.
D. Money can be easily earned.
of the following is NOT true of taxes?
A. The lower the taxes, the lower the prices.
B. A government can regulate prices by changing its tax policy.
C. The higher the taxes, the lower the prices.
D. VAT is a symbol of higher taxes.
in the final analysis, suffer from the inflation?
A. National governments
B. Businesses and banks
C. Workers in general
D. People with fixed incomes
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