Describe menu costs, transactions costs, and shoe leather costs and how these costs might affect the...

Describe menu costs, transactions costs, and shoe leather costs and how these costs might affect the speed at which prices adjust to new economic information (i.e. create inefficiencies).

What is the current rate of inflation? Is that rate higher/lower/on par with the typical range of inflation in the U.S. economy in the last decade or so? Explain answer.

Expert Solution

Menu costs: so when the inflation is high the price of goods changes quite frequently and this it is said that any restaurant will have to print new menu adjusted with the new prices. This extra cost is called as Menu cost.

Transaction cost will be the cost of proving goods or services in a firm from the market rather than providing it from within the firm.
Shoe leather cost refer to the ever increasing rate of inflation which makes us take frequent visits to the bank because the real interest rate which is r=i-pi is going down. This extra trip to banks is called as shoe leather cost.
If there is some kind of distrubance then shoe leather cost and menu cost is going to create inefficiency by the delay mechanism in adjustment of price.
Inflation is anchored at 2.1 % which is lower than the previous period.
However it is within the band of 2% ± 1% suggesting that infaltion is well anchored and is more or less constant. Lastly, Falling gasoline prices and falling fuel prices can explain this movement in inflation.

Rahul Sunny answered 2 years ago

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