2.5: Costs of Inflation Flashcards
Who is hurt by unanticipated inflation?
- Lenders who lend money at a fixed interest rate
- People with fixed income
- Savers
Who is helped by inflation?
- Borrowers who borrowed money at fixed interest rate
- Bussiness where product prices increase faster than price of resources
Nominal vs Real wage
How its measured
Wage measured by dollars rather than purchasing power vs wage adjusted for inflation
Costs of Inflation
Menu costs, shoe leather costs, unit of account costs
Menu costs
It costs money to change listed prices
Shoe Leather Costs
The costs of transactions increase leading people to reduce their real money holdings
Unit of Account Costs
Money doesn’t reliably measure the value of goods and services. It leads to less efficient use of resources because of the uncertainty caused by changes in currency value
Aggregate Demand
Total demand for all finished goods and services that consumers want at current prices
Aggregate Supply
Total amount of goods and services that suppliers want to supply at those prices
Demand-pull inflation
When consumers increase demand, producers try to increase supply. If that supply is unavailabe, producers increase prices
agd > ags
Inflationary Spiral
Attempts to counteract infaltion causes more inflation
