Costs of Inflation

Question 0

Menu costs

Answer 0

Constant changes in price levels mean that businesses, especially takeaways, have to continually change their prices.
This is costly in both time and money.

Question 1

Fall in the value of money

Answer 1

A rise in price levels mean that the value of money falls. People can’t buy as many goods with their money. Their purchasing power has reduced.
Living standards reduced

Question 2

Shoe-leather costs

Answer 2

Inflation means that people have to spend time searching for the best deals in goods or bank services. This time is an economic cost.
Opportunity cost

Question 3

Inflationary noise

Answer 3

Reports in the media make people believe that price levels have risen. They are therefore prepared to spend more money on products when this may not have happened.

Question 4

Random distribution of income

Answer 4

When there is inflation, skilled workers gain pay rises but minimum wage workers do not. This is a huge problem for the Government who will be unable to adequately redistribute income from the rich to the poor.

Question 5

Fiscal drag

Answer 5

This occurs when people gain a pay rise that matches inflation and maintain spending power BUT this moves them into a higher tax bracket and makes them worse off.

Question 6

Uncertainty

Answer 6

Unanticipated inflation causes firms and consumers to lose confidence, leading to a fall in C+I+ possibly negative economic growth.

Question 7

Inflation causing inflation

Answer 7

When people and firms hear that price levels may rise they stock up on products. This leads to an increase in C, causing an increase in AD, leading to inflation.

Question 8

Loss of international competitiveness

Answer 8

Inflation caused price levels to rise, which means that UK products become more expensive for people abroad, this the UK loses competitiveness.