List and define any two of the costs of high inflation
The costs include:
Shoeleather costs: the resources wasted when inflation induces people to reduce their money holdings.
Menu costs: the cost of more frequent price changes at higher inflation rates.
Relative Price Variability: because prices change infrequently, higher inflation causes relative prices to vary more. Decisions based on relative prices are then distorted so that resources may not be allocated efficiently.
Inflation Induced Tax Distortions: the income tax is not completely indexed for inflation; an increase in nominal income created by inflation results in higher real tax rates that discourage savings.
Confusion and Inconvenience: inflation decreases the reliability of the unit of account making it more complicated to differentiate successful and unsuccessful firms thereby impeding the efficient allocation of funds to alternative investments.
Unexpected Inflation: inflation decreases the real value of debt thereby transferring wealth from creditors to debtors.
You might also like to view...
Refer to Figure 4-1. What is the total amount that Kendra is willing to pay for 3 ice cream cones?
A) $2.50 B) $7.50 C) $9.00 D) $13.50
A company that retains a high bond rating during a recession in which many other companies see their bond ratings cut will experience
A) an increased flow of funds into the market for its securities. B) an increased demand for its securities, resulting in a higher expected return. C) a decreased demand for its securities, resulting in a lower expected return. D) a decreased flow of funds into the market for its securities.
Suppose people anticipate inflation will be 3 percent during the next several years. If this is true, when the real interest rate is 4 percent, what will be the nominal (money) interest rate?
What will be an ideal response?
Which of the following is NOT an assumption of the classical model?
A. People are motivated by self-interest. B. Money illusion exists. C. Wages and prices are flexible. D. Pure competition exists.