What are the costs of inflation? Briefly explain each

Question

What will be an ideal response?

Answer 1

The costs of inflation are the tax costs, the shoe-leather costs, the confusion costs, and the uncertainty costs. The tax costs refer to the point that the higher the inflation rate, the lower the after-tax real interest rate. As a result, people decrease their saving and so investment decreases. Shoe-leather costs reflect the costs incurred by people to spend money as rapidly as possible when inflation is high because high inflation means that the value of money is decreasing rapidly. Confusion costs are the result of inflation making it more difficult to use money to compare the costs and benefits of actions, such as saving or investing. Finally, uncertainty costs occur because people are uncertain about the long-term inflation rate. When making an investment or saving decision, people must try to factor in what the inflation rate will be throughout the life of the investment or saving, which is a difficult endeavor.