The existence of inflation does which of the following?
A)reduces tax distortions
B)reduces shoe-leather costs
C)allows for the possibility of negative real interest rates
D)reduces the costs associated with money illusion

Question

Quizplus · Accepted Answer

Inflation allows for the possibility of negative real interest rates. Real interest rates are the nominal interest rate minus the inflation rate. If inflation is higher than the nominal interest rate, then the real interest rate is negative. This can stimulate borrowing and investment, as it effectively means that borrowers are being paid to borrow money. However, negative real interest rates can also lead to economic instability, as savers may be discouraged from saving and investors may be incentivized to take on riskier investments.

The Existence of Inflation Does Which of the Following