Inflation

Question 1

Inflation definition

Answer 1

The increase in price in everything

Question 2

Consumer price index (CPI)

Answer 2

Measures general level of prices that consumers have to pay for goods and services, including consumption taxes

Question 3

Downward nominal rigidity

Answer 3

If you got a certain price for it last month, you don’t want to accept a lower price for it this month

Question 4

Economic costs of inflation

Answer 4

Shoe leather costs
Menu costs
Political costs
Increased variability and uncertainty of relative prices

Question 5

Shoe leather costs

Answer 5

Increased effort and time individuals spend managing cash holdings during high inflation, such as making frequent trips to the bank to withdraw smaller amounts, metaphorically wearing out their “shoe leather.”

Question 6

Menu costs

Answer 6

Costs businesses incur when frequently changing prices due to inflation, including expenses like reprinting menus, updating price tags, and adjusting computer systems

Question 7

Political costs

Answer 7

High inflation can cause public dissatisfaction, leading to political pressure on governments, which may hinder the implementation of effective economic policies

Question 8

Increased variability and uncertainty of relative price

Answer 8

Inflation can obscure price signals, making it harder to distinguish between general price increases and changes in relative prices, leading to inefficient resource allocation

Question 9

Unanticipated inflation

Answer 9

Whilst not directly being an economic cost it does cause arbitrary redistributions of wealth.
This arbitrariness could certainly be considered a cost

Question 10

Debt deflation

Answer 10

If economy falls into deflation, then borrowers must repay even more
in real terms: hence “debt deflation”
A large negative income shock to those who likely can least afford it
Likely causes defaults which make everyone in who economy poorer