Whichisbetter: highor low inflation?

1There are several macroeconomic issues facing any economy today. These include inflation, unemployment, interest rates, balance of payments, and exchange rates. They are consistently crucial.

2 In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time. The opposite of inflation is deflation, i.e. a decrease in inflation rates.

3As inflation rises, in addition to businesses being forced to raise their prices, banks are forced to raise interest rates in order to maintain a profit margin and higher rates mean that marginal businesses will fail, thus increasing unemployment and harming the overall economy. High inflation harms everyone not just because of increased costs and increased unemployment but also due to the time lag before you get a cost of living increase. High inflation also encourages people to spend money “before it loses its value” so they will buy things they don’t need simply as a method of preserving value. They also go into debt and fail to save. In the short run this can stimulate the economy but in the long run it will result in poor choices and a less than optimal economy as everyone becomes so short sighted that they fail to plan for the long run.

4 Deflationencourages people to reduce high debt loads and become more financially responsible (as does a rising unemployment rate and job uncertainty). As inflation comes down it becomes less advantageous (выгодно) to carry high debt. When inflation rates are falling, people need to eliminate their debt because in real inflation adjusted (споправкойна) terms it is becoming more expensive for them. Fortunately, since most loans are written with the expectation of a margin of profit over and above inflation as inflation rates fall so do interest rates. Therefore, as inflation rates fall it is important to refinance your debts at lower interest rates thus reducing your debt servicing costs.

5Inflation encourages debt because you can pay it off with “cheaper dollars”. Deflation (falling prices) on the other hand can be downright disastrous for those with high debt, because their debt is in a fixed number of dollars but each dollar is more valuable than when the debt was first incurred.

6 The obvious short-term effect is that creditors with loans on their books benefit. They loaned money and are getting paid back with dollars that have a greater purchasing power. Conversely, borrowers spent money and now have to pay it back not only with interest but with more valuable money.

The down side is that in the long run banks will not make as many loans, because people tend to avoid debt if they feel it is in their best interests to save. So banks prefer a low stable inflationary environment, where people are confident enough to borrow but where inflation is not high enough that people become fearful of inflation outstripping wage increases.

7Deflation benefits low debt consumers and those on fixed incomes, because they receive a fixed number of dollars but can buy more with each dollar but deflation hurts individuals, businesses and governments with high debt loads.

8 High inflation is bad for the economy because economies built upon debt and encouraging consumers to go further into debt eventually crumble of their own weight. As more and more consumers get over burdened by debt, they declare bankruptcy, introducing uncertainty to the creditors and robbing them of their rightful income.Somehow it is difficult to feel compassion for the “rich creditors” but everyone with a bank account is a creditor.

9If you were uncertain about the value of the money you put in the bank, what would you do? You would probably be less likely to put money in. Banks feel the same way, if the chances of default increase, banks are less likely to make loans and that decreases the health of the overall economy.Rapidly falling or rising inflation is usually a sign of a suffering economy with high unemployment and a lack of spending power, i.e. recession/ depression.

Source: http://inflationdata.com/articles/2009/11/25/which-is-better-high-or-low-inflation/

Задание 8. Напишите заголовок к каждому параграфу текста.

Задание 9. Определите верно (True) или ложно (False) утверждение. Исправьте неверное утверждение.

1) No economy today faces any macroeconomic issues.

2) Both inflation and deflation relate to prices.

3) A price index reflects the inflation rate.

4) When inflation rates are falling, people need to eliminate their debt.

5) As inflation rates fall, interest rates remain the same.

6) Neither rapidly falling noкrising inflation is a sign of a suffering economy.

Задание 10.Письменно ответьте на следующие вопросы.

1) What is the difference between inflation and deflation?

2) When does money become cheap?