Question

• High rate of inflation is considered bad for the economy since it has various costs. What are the costs of inflation? Which of these costs do you think are most important for the U.S. economy? What are your shoe leather costs of going to the bank? How might you measure these costs in dollars? How do you think the shoe leather costs of your college president differ from your own?

Answer 1

A cost of inflation is measured by many factors such as -

1- Reduce in international competition-
Any country having a higher higher inflation rate than its trading partner country, it exports will become less competitive leads to fall in exports and negative effect on current account.

2- Uncertainty -

If inflation is high in a country people are uncertain about their income to spend on, also when inflation is high, firms are usually less willing to invest because they are uncertain about future prices, profits and costs. This uncertainty leads to lower economic growth.

3- Fluctuated economic cycle -

A inflationary growth always bring recession in the country. By keeping inflation low, it enables a long period of sustainable economic growth.

4 - Unstable price of Goods and services -

A high inflation rate always bring frequent price changes which incurs a cost.

5 - Income Distribution -

Inflation make borrower healthier and lenders weaker. Inflation reduces the value of savings, especially if the savings are in the form of cash or bank account with a very low-interest rate.

6- Fiscal effect -

The amount of tax we pay increases if there is inflation. This is because with rising wages more people will slip into the top income tax brackets.

7- Falling real Income-

A small increase in the inflation leads to a fall in the income.specially public sector workers.

Above all the cost are important for the US economy point of view, its affects the economy from time to time.

Shoe-Leather Cost-

Shoe-leather costs refer to the time and effort people take to minimize the effect of inflation on the eroding purchasing power of money. It suggests that people spend their time and resources to manage their money and other financial assets, i.e. inflation-hedging activities, rather than using those resources to produce goods and services.