Describe how inflation can be costly even if it is anticipated
What will be an ideal response?
First, there will be redistribution as some incomes fall behind even an anticipated level of inflation. Second, firms and individuals must hold money to perform transactions. Those holding money lose purchasing power at a rate equal to inflation. Third, firms must pay individuals to change prices. These costs, called menu costs, can be substantial at very high levels of inflation. Fourth, investors have to pay higher taxes on interest and capital gains income as the government taxes nominal interest and capital gains income. Investors then lose real after-tax income.
You might also like to view...
Suppose a perfectly competitive firm's minimum average variable cost is $3 when it produces 50. If the price is $2 and the firm's marginal cost is $2, the firm should
A) continue to produce, but produce more than 50. B) continue to produce 50. C) continue to produce, but produce less than 50. D) shut down. E) continue to operate, but to determine the amount of production needs more information than is given.
Suppose that an individual consumes just two goods: Big Macs and milkshakes. In order to reach consumer equilibrium, the individual must arrange the consumption of Big Macs and milkshakes so that the:
a. marginal utility of the two goods is equal for the last dollar spent on each good. b. ratio of marginal utility to price is the same for both goods for the last dollar spent on each good. c. ratio of marginal utility of milkshakes to the marginal utility of Big Macs is 1 for the last dollar spent on each good. d. price paid for the two goods is the same.