Inflation and Deflation 2

Gap-fill exercise

Fill in all the gaps using the AWL words in the list, then press "Check" to check your answers. Use the "Hint" button to get a free letter if an answer is giving you trouble. Note that you will lose points if you ask for hints or clues!
   accumulated      adjusted      adjusting      adjustments      aggregate      anticipate      anticipated      appreciation      approach      attitudes      automatic      available      benefit      bonds      capacity      clauses      concentrates      construction      consumer      consumers      consumption      contracts      create      creating      credit      currency      declines      defined      depressed      depresses      Despite      Domestic      dominates      economic      economist      economists      economy      element      elements      erodes      erosion      estate      eventually      exceed      exceeds      explicitly      export      exports      federal      finance      financial      financing      flexible      fluctuate      fluctuates      fluctuating      fundamental      impact      incentives      incomes      indexed      individuals      initially      institutions      investment      issues      labour      maintain      major      margins      normal      occurs      offset      output      overall      plus      policies      potential      psychology      published      purchasing      regulations      respond      response      restrict      restricted      revenues      reversed      sector      shift      significant      specific      stable      technological      temporarily      temporary      theories      theory      transfers      variables      volume      volumes      widespread      XXXX   
Causes
Demand-pull inflation when demand existing supplies, forcing price increases and pulling up wages, materials, and operating and costs. Cost-push inflation when prices rise to cover total expenses and preserve profit . A pervasive cost-price spiral develops as groups and to each new round of increases. Deflation when the spiral effects are .

To explain why the basic supply and demand change, have suggested three substantive : the quantity of money; the level of ; and supply-side productivity and cost . Monetarists believe that changes in price levels reflect of money , usually as and demand deposits. They argue that, to prices, the money supply should increase at a rate commensurate with the 's real . Critics of this claim that changes in the money supply are a to, rather than the cause of, price-level .

The level of income is based on the work of the British John Maynard Keynes, during the 1930s. According to this , changes in the national income determine and rates; thus, government fiscal spending and tax should be used to full and employment levels. The money supply, then, should be to the desired level of growth while avoiding crises and high interest rates that discourage and . Government spending and tax can be used to inflation and deflation by supply and demand according to this . In the U.S., however, the growth of government spending "off-budget" outlays (expenditures for a variety of programs not included in the budget) and government programs have been more rapid than the real growth rate since the mid-1960s.

The third on supply-side that are related to the of productivity. These include the long-term pace of capital and development; changes in the composition and age of the force; the away from manufacturing activities; the rapid proliferation of government ; the diversion of capital into nonproductive uses; the growing scarcity of certain raw materials; social and political developments that have reduced work ; and various shocks such as international monetary and trade problems, large oil price increases, and sporadic worldwide crop disasters. These supply-side may be important in developing monetary and fiscal .

Effects
The effects of inflation and deflation are mixed and over time. Deflation is typically caused by and unemployment. Lower prices may encourage improvements in , , and foreign trade, but only if the causes of the original deterioration are corrected.

Inflation increases business profits, as wages and other costs lag behind price increases, leading to more capital and payments of dividends and interest. Personal spending may increase because of "buy now, it will cost more later" ; real price may attract buyers. inflation may improve the balance of trade if the same of can be sold at higher prices. Government spending rises because many programs are , or informally, to inflation rates to preserve the real value of government services and of income. Officials may also paying larger budgets with tax from inflated .

these gains, however, inflation disrupts activities, particularly if the pace . Interest rates typically include the pace of inflation that increases business costs, discourages spending, and the value of stocks and . Higher mortgage interest rates and rapidly escalating prices for homes discourage housing . Inflation the real power of current and assets, resulting in reduced , particularly if are unable, or unwilling, to draw on their savings and increase personal debts. Business suffers as activity , and profits are as employees demand immediate relief from chronic inflation through cost-of-living escalator . Most raw materials and operating costs quickly to inflationary signals. Higher prices foreign sales, deficits in trade and services and international -exchange problems. Inflation is a in the prevailing pattern of booms and recessions that cause unwanted price and employment distortions and uncertainty.

The of inflation on depends on many . People with relatively fixed , particularly those in low-income groups, suffer during accelerating inflation, while those with bargaining power may keep pace with or even from inflation. Those dependent on assets with fixed nominal values, such as savings accounts, pensions, insurance , and long-term debt instruments, suffer of real wealth; other assets with values, such as real , art, raw materials, and durable goods, may keep pace with or the average inflation rate. Workers in the private strive for cost-of-living in wage . Borrowers usually while lenders suffer, because mortgage, personal, business, and government loans are paid with money that loses power over time and interest rates tend to lag behind the average rate of price increases. A pervasive "inflationary " private and public decisions.