Question

Part 2: Check Your Understanding​- Assume an economy is experiencing higher inflation which​      negatively affects the following individuals. Choose the best category for each of the situations below.

Situation	Shoe Leather Cost	Menu Cost	Unit of Account Cost
14. Walmart must hire additional workers to replace all the price tags on their products every week.
15. An attorney spends two hours each week researching if her hourly rate is comparable to other lawyers.
16. Each month your rent increases so you can’t set up an online automatic payment. You must deliver the rent to your landlord in person.
17. A grandma increases the number of times she goes to the grocery store.
18. The owner of a restaurant spends an extra two hours a week creating and updating coupons.
19. You want to sell your car but you prefer to trade it for something more tangible than cash.

Answer 1

Situation 14:

Menu Cost is the category of cost which occurs in this situation. Due to inflation, Walmart has to change the price it charges again and again, and incurs additional costs for this purpose.

Situation 15:

Unit of Account Cost is the best category which explains the cost of inflation in this situation. Since rising prices have reduced the purchasing power of her income, the attorney compares the real value of her income with other employees which is a unit of account cost (occuring due to change in value of unit of account).

Situation 16:

Shoe leather cost is the category which best describes this situation. Due to inflation, the number of trips made to landlord to pay the bill have increased which could have been avoided in absence of inflation. (Shoe leather cost symbolises the wear and tear in shoes which occurs due to increased trips to bank or other entities caused by inflation).

Situation 17:

Shoe leather cost is the category that best describes this situation. Due to inflation, grandma must run to grocery store again and again causing wear and tear in her shoes.

Situation 18:

Menu Cost is the category which best describes this situation. The extra time and resources spent on updating coupons due to inflation is a kind of menu cost.

Situation 19:

Unit of account cost is the best category which explains this situation. Since purchasing power of money is falling during inflation, the unit of account (cash) is no longer reliable and people want to exchange goods for other tangible assets.