When Prices Rise
Written by Studio AM.
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Inflation is a rise in the general level of prices over time. One price can rise for a particular reason, such as a poor coffee harvest. Inflation concerns a broader pattern: money buys less of a representative set of goods and services.
A consumer price index tracks this pattern. It combines prices for items such as food, housing, transport and clothing, giving more weight to categories that account for more spending. In a simple example, a basket costing 100 last year costs 104 now. Its cost has risen by four percent. An individual household's experience may differ from the average.
Inflation affects people differently. Cash that earns no interest loses purchasing power as prices rise. For a loan with fixed payments, unexpectedly high inflation reduces what those payments are worth in real terms. That can benefit the borrower relative to the lender, but it does not guarantee that the borrower can afford the payments. Income and other expenses also matter.
Comparing the overall rate is therefore only a starting point. To understand its effect on a household, we also need to consider what it buys, earns, saves and owes.
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Questions
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Question 1 of 4
What is the main point of the passage?
The answer is C: Inflation describes a broad rise in prices whose effects vary across households.
The passage defines and measures inflation, then explains why spending patterns, savings, income and debt affect its impact.
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Question 2 of 4
In the example, the basket's cost rises from 100 to 104. What is the increase?
The answer is B: four percent
The increase is 4 on an original cost of 100: four percent.
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Question 3 of 4
Two households earn the same income, but one spends much more on fuel. If fuel prices rise sharply, what is likely?
The answer is D: The household spending more on fuel may face a larger increase in costs.
The index is an average. Different spending patterns mean a particular price rise can affect households differently.
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Question 4 of 4
As used in this passage, a "basket" is
The answer is A: a selected group of goods and services whose combined cost is tracked
Here 'basket' means the items used together to compare costs, not a physical container.
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