Explain how inflation can be costly even if it is expected
What will be an ideal response?
There are four costs of expected inflation.
1. Seigniorage - the government's profit from issuing fiat money; also called the inflation tax. When the government increases the money supply, this causes inflation and the purchasing power of money decreases.
2. Shoe-leather costs - the costs of inflation to households and firms due to holding less money and making more frequent trips to the bank or ATM.
3. Tax distortions - changes in expected inflation can change the real, after-tax cost of borrowing.
4. Menu costs - the cost to firms of changing prices due to reprinting price lists, informing customers, and angering customers.
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Moving on a bowed out PPF, what happens to the opportunity cost of its production as a nation specializes more in one product?
What will be an ideal response?
In the presence of pollution, social welfare is maximized by
A) reducing output and pollution until marginal benefit of less pollution is equal to the marginal cost of less output. B) reducing output and pollution until the benefit curve (of less pollution) and cost curve (of less output) intersect. C) reducing output and pollution until the benefits of pollution reduction just cover the costs of output reduction. D) None of the above.
What is Gross Domestic Product? What is included in this statistic? What is excluded? Give two examples of goods or services that are included in GDP and two examples of goods or services that are excluded
Figure 4-22
Refer to . From this tax the government will collect a total of
a.
$125.00.
b.
$175.00.
c.
$200.00.
d.
$250.00.