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.
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Refer to Scenario 11.1. Suppose all five ranchers know that Mariana has $3 million to spend on their land and they also know that their land that Mariana needs is worth a total of $2 million
Each rancher believes that one or more of the other ranchers will settle for less than the maximum value of their land and therefore each decides to ask Mariana to pay $750,000 for their parcel of land. In this situation, the economic pie will A) grow by $3.75 million. B) grow by $3 million. C) not grow. D) shrink by $1 million.
The balance of payments is zero
A) as an accounting identity. B) because market forces ensure that this is so. C) only if the current account balance is zero. D) only if the capital account balance is zero.