Read the summary which explains what open market operations are. Try to complete the gaps with words from the box.

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Read the summary which explains what open market operations are. Try to complete the gaps with words from the box.

■ borrow ■ decreases ■ lend

■ reserve ■ selling ■ shortages (x2)


The government can create

(1)......................of money for commercial

banks by (2)......................securities.

Securities are a way to (3)......................

money to the government at an agreed rate of interest. This is what is known as open market operations. When people buy securities the money

supply (4).......................This causes

(5) the commercial banks'

(6)......................accounts, so they have to

(7) from the central




С Listening )))

Now you're going to hear someone talking about open market operations. Listen and check your answers.




Before you read


Discuss these questions with your partner.


Economists sometimes talk about economic shocks.

What do you think this might mean?

What might cause a shock to the economy?

D Vocabulary

Complete each sentence with a word or phrase from the box.

■ disrupt ■ go on strike   ■ gross national product   ■ miner
■ sharply ■ stagflation ■ unrest   ■ knock-on effect



1 The total value of a country's goods and services consumed in one year is called the.....................

If something done affects something else, which then again affects something else, we call this a

3 If people are not happy with their government, there may be political.......................

4 Being a......................and digging underground

to bring out minerals, must be very dangerous.

5 Some a way of showing

their unhappiness with work conditions or pay.

6 If we have.......................there is a sharp drop

in production of some goods causing their price to rise.

7 A fallen tree can......................the electricity

supply to thousands of homes.

8 Prices have risen......................but unfortunately

wages haven't.

В Reading 2

Economic shocks

Governments try their best to control economic growth, but there arе some things that nobody can control. For example war, political unrest

in another country or simply a change in the weather can all affect an economy in unexpected ways. Sometimes the effect of these events will cause a sudden shift in aggregate demand or aggregate supply. This is an economic shock.

The causes of demand- sideshocks may be events in the local economy (domestic demand) or events abroad (external demand). An example of domestic demand was when house prices in the UK dropped suddenly in the late 1980s. Because a home is one of the largest assets most people have, homeowners suddenly felt that they were not as wealthy as they had been. As a result, people started to spend less. This had a knock-on effect on the rest of the economy. Aggregate demand fell sharply and the gross national product tell with it.






External demand-side shocks happen when a country relics heavily on exports or on foreign investment. The Great Depression in the is

a classic example of this. At the time of the Great Depression, many countries exported their goods to the USA. and many other countries relied on American money for investments to help their industries grow. When the American economy collapsed, it had disastrous effects for other economies, too.

Supply-side shocks occur when the supply of goods is disrupted. If the commodity is an important raw material for many industries, then the supply from these industries will drop dramatically. When raw materials are in short supply, they become more expensive. This will cause an increase in manufacturers' variable costs Manufacturers will then have to increase their prices.

Imagine, for example, that miners in the iron industry went on strike. The supply of iron and steel to manufacturers would be disrupted. This would mean a drop in supply of all sorts of goods, from teaspoons to aeroplanes. As you can see from figure 2 below, the sudden drop in supply will cause a shift in the supply curve. As a result, prices rise even though aggregate demand stays the same. This unfortunate situation is called stagflation.

The good news, however, is that sometimes positive supply-side shocks happen. These occur when there is a sudden increase in supply while demand stays the same. This can happen when new technology makes the production of materials or products much easier or more efficient. The result - prices fall and output grows.


E Comprehension

Now read the text again and choose the best way to finish each sentence.

1 An economic shock causes ...

A prices to rise,

B demand or supply shift,

C demand to fall.


2 Demand- side shocks of a domestic nature ...

A are caused by events in another country.

B are only caused because of a fall in

property prices.

C are caused by events at home.


3 The Great Depression is an example of...

A an external demand-side shock.

B an external supply-side shock.

C a domestic demand-side shock.


4 Supply-side shocks can cause ...

A a fall in variable costs.

B an increase in variable costs.

С a fall in fixed costs.


5 Stagflation is when ...

A prices fall but output rises,

B prices rise and output rises,

C prices rise and output falls.


6 A positive supply-side shock is when ...

A prices fall but output rises,

B prices rise and output rises,

C prices rise and output falls.


Before you listen _

Discuss the following with your partner.

An embargo happens when a country stops trading with another. In 1973, there was an embargo on oil. What effects do you think this had on the worlds



F Listening )))

Now listen and complete the notes.

1 After.......................industrial nations enjoyed

economic growth.

2 They used huge amounts of .......................

3 A lot of oil came from countries in the.................

4 The embargo began on the......................, 1973.

5 Prices of oil rose to......................times higher

than before.

6 The New York Stock Exchange lost......................

dollars in a few weeks.

7 The embargo ended in.......................





Discuss the following with your partner.

Look at figure 1 on page 78 and figure 2 on page 80 again. Take turns explaining to your partner what the diagrams show.


Work in groups of three or four. Discuss the effects that these events might have on the economy in your country. Use phrases to describe economic shocks as seen in text 2. Use the space below to make your notes.

coal miners go on strike

large amounts of oil and gas are discovered in Australia

the government provides a free Internet service to anyone who wants it

the interest rate doubles in just a few weeks


H Writing

Write an essay describing how interest rates are set in the money market. First read through text 1 again and make notes. Then use the plan to help you organise your essay.



What are interest rates and why are they important for the economy?


What does the money supply consist of? What is demand and supply in the money market?


How is the interest rate set by the money market?


How does the government try to influence the interest rate?


Sum up in a couple of sentences what you have said in paragraphs one to three.

Write 200-250 words





Before you read_

Discuss these questions with your partner.

Inflation is the rising cost in prices over time. Does your country suffer from inflation? Why do you think this is?


A Vocabulary

Choose the correct word.

1 When something is in the headlines / articles, it is an important story in the news.

2 When parents are unemployed it is difficult for a family to make ends touch / meet.

3 The cost / price of living in cities like London and Tokyo is very high.

4 People prefer to shop in supermarkets because they find a wide range / amount of goods there.

5 The retail / shopping industry includes shops, supermarkets and department stores.

6 In statistics, when a number is valued / weighted it is multiplied by another number to show its importance.

7 The victim / culprit is the person or thing that is responsible for doing sometlhing bad.

8 It is difficult for old people to manage / cope with Irving on a small pension.

9 In maths, a/an equation / formula is a sum which is equal on both sides.

10 The speed that something travels at is called

velocity / capacity.

Reading 1


Inflations is an overall increase in prices over a certain period of time. It's also a worry for anybody who's trying to make ends meet, and a headache for many governments. The rate of inflation is often in the headlines. However inflation isn't really news. In most of Europe, for example, prices have risen year after year for at least the last 50 years. Deflation (overall decrease in prices) does happen occasionally, but the trend is mostly for the cost of living to increase.

There arc lots of ways to measure inflation. One of the most popular ways is the retail price index. This is calculated by recording increases in price for a range of goods and services . This is sometimes called a basket of goods. Some of the goods are weighted more heavily than others because they are more important. For example, food will be weighted more than the cost of a cinema ticket, because a 5% increase in food is more important than a 10% increase in the cost of seeing a film. Inflation is worked out from an average of all the price increases in the basket.





Inflation can happen for a number of reasons, but economists say there are two main culprits. Thereare demand-pull inflation and cost-push inflation. Demand pull inflation can happen when the economy is growing fast. Aggregate demand begins togrow faster than suppliers can cope with. This cauises ashortage, and prices rise. At first, customers may be able topay the higher prices. and demand growsagain. This forces prices up even more, and the cycle continues.

One ofthe characteristics ofdemand-pull inflation is thru there is often too much money going round the economy. This is explained by the quantity theory of money.This theory uses the following equation.

money supply x velocity = average price x transactions.

Velocity is the speed that money is passed on from one person to another. Some economists say that velocity and the number of transactions don'treally change. The only things that change in this equation arc the money supply and average prices. This means that when the money supply increases, prices will increase too.For this reason, printing money is rarely a solution for economic crises.

Cost- push inflation, onthe other hand, occurs when prices rise without anincrease in demand This happens when suppliers' variable costs increasesharply. For example, workers may demand higher wages orraw materials may become more expensive. Producers then pass these increases on toconsumers by raising prices. So,as usual, weare the ones who pay!

В Comprehension

Now read the text again and match each paragraph with the correct heading.

PARAGRAPH 1......................

PARAGRAPH 2......................

PARAGRAPH 3......................

PARAGRAPH 4......................

PARAGRAPH 5......................

A Measuring inflation

B Too much cash

C The effects of aggregate demand on

D inflation D Production cost changes

E Inflation is a fact of life


Before you listen


Discuss the following with your partner.

High inflation affects the whole

economy in different ways. How do you think inflation affects the people and organisations listed below? Try to match the people and organisations 1 -4 with the effects A-D.

1 people on

a fixed income

2 banks

3 businesses

4 exporters

A lose money on loans

В can't get investment

С are not so competitive

D can't buy as much with their money

С Listening

Now listen and check your answers.





Before you read _

Discuss these questions with your partner.

Look at the photo and answer these questions:

What are these people doing?

How do yon think they leal? Why?

Why do you suppose they are in this situation?


D Vocabulary

Complete each sentence with a word or phrase from the box.

■ can't be bothered ■contracts ■ freelance ■mobility
■obsolete ■ region ■ relocates ■ retrain  
■ shipyard ■ tastes      


1 People' clothes change with

fashiar and with their age.

2 If do something, you just

don't feel like doing it.

3 When gets smaller.

-I an area of a country.

When a another part

of the country or abroad, many workers lose then jobs.

6......................workers are not employees for a

company, but are self-employed.

7 If something is......................, it no longer exists

because it isn't needed anymore.

If you lose your job due to mechanisation, you

may have to go to college and......................for

something else.

9 where ships are built.

10 your ability to move from

one place to anothe

Reading 2


There will always be a certain amount ofunemployment in the economy. When economist talk about full employment they mean that everyone who can work and wants to work has got a job. Able workers who arc not working are simply not happy with the salaries that are offered - or just can't be bothered!

However, economics rarely reach lull employment. There are a number of reasonstor this, and a number of different types of unemployment. One of these is cyclical unemployment. This type of unemployment varies with the growth and recession cycle of the economy As the economy grows, demand for labour grows and unemployment falls .As the economy contracts, unemployment grows

A second kind ofunemployment is structural unemployment. This occurs when changing public tastes or advances in technology cause a fall in demand for sonic types of work. For example, computer technology has revolutionised the priming industry, and many traditional printers' jobs have become obsolete. Sometimes whole regions of a country suffer from high structural unemployment. The north-east of England for example, was famous for many years for its shipbuilding industry. Competition from abroad





forced many shipyards to close. This caused huge unemployment in the region.

How long structural unemployment lasts will depend on two things. Firstly, how easily the workforce can retrain for new jobs. This may he difficult for older workers who find it hard to learn new skills. There is also the question of who pays for the training. The second issue is mobility. Workers who are able to relocate easily to another part of the country will find new jobs more quickly.

There are two other kinds of unemployment which we should mention here. These are less serious, perhaps, but they are still difficult for governments to get rid of. The first is frictional unemployment. This is a natural kind of unemployment that occurs when someone leaves a job and is looking for another one that suits them. Frietional unemployment often happens because people want to leave their job in order to change careers. Few people walk straight into another job. However, when the economy is in recession, frictional unemployment will be more common because jobs are harder to find.

The second kind is seasonal unemployment Some industries have busy periods and periods where there is no work at all. Some freelance farm workers, for example, get most of their work in the spring and summer. Like structural unemployment, seasonal unemployment can affect whole regions of a country. Areas that rely on summer tourism, for example, suffer serious unemployment during the autumn and winter months.


E Comprehension


Now read the text again and choose the best answer or answers for each question.

1 Which kind of unemployment happens regularly every year?

A cyclical unemployment

B structural unemployment

C frictional unemployment

D seasonal unemployment


2 Which kind of unemployment happens because of advances in technology?

A cyclical unemployment

B structural unemployment

С frictional unemployment

D seasonal unemployment


3 Which kind of unemployment may happen because someone wants it?

A cyclical unemployment

B structural unemployment

C Frictional unemployment


D seasonal unemployment


4 Which kind of unemployment happens because of changes in economic growth?

A cyclical unemployment

B structural unemployment

С frictional unemployment

D seasonal unemployment


5 Which kind of unemployment happens in particular parts of the country? (2 answers)

A cyclical unemployment

B structural unemployment

C frictional unemployment

D seasonal unemployment

Before you listen__

Discuss these questions with your partner.

The chart below shows the trends in unemployment in two countries. Look at the chart, and answer these questions.

What does the vertical axis show?

What does the horizontal axis show?

What two countries are shown?

How many years are shown?

Are there any similarities between the curves for the two countries?

f Listening }}}

Now listen and write the correct percentages on the chart. The first answer has been done for you.

Unemployment is Germany and the USA 1995-2005




G Speaking

Discuss these questions with your partner.

Is inflation а problem in youcountry? Why /Why not?

How does unemployment affect people psychologically?

What kind(s') of unemployment do you think affect the area where you live?

Can you talk about the history of unemployment in your country since the 70s like the diagram in exercise Г Listening on page 85?


Work in groups of three or four. Imagine you and your friends are running the country. Things are not going well! Here are some of your problems.

unemployment is high (12%)

the rate of inflation is also high

workers are going on strike for higher wages

your large steel industry is losing money because of foreign competition

Talk to each other and decide which of these problems is the most important. Then decide what you can do to make things better. In your discussion think about:

retraining / relocation of workers

cost-push inflation

the money supply

Use the space below to make your notes.



H Writing



Imagine you are a shipyard worker who has just become unemployed because the government has decided to close down the shipyards. Write a letter to a friend explaining what's happened and how you feel about it.

Informal letter

Use this plan to help you.



Thank your friend for his/her last letter. Respond to a piece of news he/she had in his/ her letter. Tell your friend your bad news.


Explain how you lost your job. Explain what the government's reasons were for closing the yard (inflation made exports uncompetitive).


Explain how you feel about losing your job. How is it affecting you and your family?


Explain what you're planning to do (retrain / relocate?).

Sign off

Write 100-140 words

Pronunciation guide













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