Question

Chapter 11, 12: Money and Inflation

III. Define the following costs of high inflation and find examples.

1. Menu costs

2. Shoeleather costs

3. Confusion and inconvenience

4. Distortions in relative prices and the allocation of resources

5. Tax distortions

6. Arbitrary redistributions of wealth

Reference: Brief Principles of Macroeconomics textbook

Answer 1

1) Menu costs- is the cost to a firm resulting from changing prices such as printing new menus, mailing new catalogs etc

2) Shoe cowhide Costs - the assets squandered when expansion urges individuals to decrease their cash property. It incorporates the time and exchanges expenses of more regular bank visits for withdrawals thus the name shoe cowhide.

3) Confusion and Inconvenience - Inflation changes the yardstick we use use to measure transactions. It complicates long range planning and the comparison of amount of given currency over time.

4) Distortions in relative costs and the allotment of assets Firms don't all raise costs in the meantime, so relative costs can fluctuate which mutilates the designation of assets to their best utilize. The buyer choices additionally gets contorted

5) Tax Distortions - Inflation makes nominal income grow faster than real income. Taxes are based on nominal income and some are not adjusted for inflation.So, inflation causes people to pay more taxes even when their real incomes don't increase.

6) Subjective redistribution of riches - Higher than anticipated swelling exchanges buying influence from banks to indebted individuals borrowers get the opportunity to reimburse their obligation with cash that aren't worth as much at this point.

Lower than expected inflation transfers purchasing power from debtors to creditors.

High inflation is more variable and less predictable than low inflation.So, these arbitrary redistributions are frequent when inflation is high.