The costs of inflation that arise from trying to reduce cash holdings are known as
A) shoe leather costs.
B) menu costs.
C) chain-index costs.
D) diminishing costs.

Question

Quizplus · Accepted Answer

Shoe leather costs refer to the costs incurred by households and firms in response to inflation by increasing their cash holdings to avoid the loss of purchasing power. The costs could include the time, effort, and resources involved in frequently visiting banks or ATMs to withdraw smaller amounts of cash, opening more bank accounts or using e-banking services to reduce the opportunity cost of holding cash. Therefore, A is the best choice. Menu costs refer to the costs of changing prices and chain-index costs refer to the costs of adjusting payments based on changes in the price level. Diminishing costs are not specifically related to inflation.

The Costs of Inflation That Arise from Trying to Reduce