In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods

Inflation

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in 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.

Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions), and (as the rate of inflation rises) debt relief by reducing the real level of debt.

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

Today, most mainstream economists favor a low steady rate of inflation. Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.

The term "inflation" originally referred to increases in the amount of money in circulation, and some economists still use the word in this way. However, most economists today call an increase in the money supply monetary inflation, to distinguish it from rising prices, which may also for clarity be called 'price inflation'. Economists generally agree that monetary inflation is one of the main causes of price inflation.

Other economic concepts related to inflation include: deflation – a fall in the general price level; disinflation – a decrease in the rate of inflation; hyperinflation – an out-of-control inflationary spiral; stagflation – a combination of inflation, slow economic growth and high unemployment; and reflation – an attempt to raise the general level of prices to counteract deflationary pressures.

Activity1 . Put 10 questions to the text.

Activity 2. Write down all unknown words into your vocabulary and learn them.

Activity 3. Translate and learn the word expressions:

internal funds

external funds

e.g. Since the funds come from within the firm they are described as internal funds. The rest must come from outside, or external funds.

to meet one's expenses

e.g. As a firm sells its products or services, it receives money which it uses to meet its expenses.

depreciation

to wear out

e.g. Depreciation represents the cost of replacing assets that wear out.

to cover the cost of smth.

e.g. Businesses use internal funds to cover the cost of depreciation.

short-term loans

e.g. Short-term loans are used to finance the everyday costs of doing business.

long-term loans

e.g. Long-term loans mature (come due) in more than a year.

the principal

e.g. Creditors expect to receive interest and the return of the principal at the end of a specific period of time.

common stock

preferred stock

e.g. All corporations issue common stock; some, however, also issue preferred stock.

to have voting rights

e.g. Preferred stockholders do not have voting rights.

security exchange

e.g. Security exchange is a market where brokers meet to buy and sell stocks and bonds for their customers.

default

e.g. There is some risk of default on the bonds of even the strongest corporations.

mutual funds

e.g. Mutual funds are corporations that sell stock and use the proceeds to invest or speculate in the securities markets.

balance sheet

income statement

e.g. Two of the most important pieces of information contained in every prospectus and annual report are the balance sheet and the income statement.

assets

liabilities

e.g. For every business the things that it owns are assets, and those it owes are liabilities.

net worth

e.g. The difference between assets and liabilities is its net worth.

Activity 4. Fill in the blanks with appropriate words:

«investors» capital money net worth

customers bonds a security exchange

long-term financing

1.... is the difference between assets and liabilities.

2. Similarly, firms need... to begin operation, to meet their day-to-day expenses and to expand.

3.... charge purchases to their accounts for payment at a later date.

4.... is money that will be used for a year or more.

5. Many large corporations raise long-term capital through the sale of their....

6. Corporations sell stocks and bonds as a way of raising....

7.... is a market where brokers meet to buy and sell stocks and bonds for their customers.

8. Those who buy stocks to share in the profits and growth of a corporation over a long period of time are described as....

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