Question 1

Inflation redistributes income to a greater extent when the inflation is unanticipated compared to when the inflation is anticipated.

Accepted Answer

When inflation is unanticipated, individuals and businesses may not have time to adjust their behavior and prices, leading to a greater redistribution of income. However, when inflation is anticipated, individuals and businesses may be able to adjust their behavior and prices through contracts or other means, mitigating the impact of inflation on income redistribution.

Question 2

Describe how inflation can be costly even if it is anticipated.

Accepted Answer

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Question 3

Which of the following is not a cost posed by inflation?

Accepted Answer

Inflation primarily affects the economy by reducing the purchasing power of money, leading to higher costs for changing prices, and necessitating predictions about future inflation. However, it does not directly reduce the affordability of goods and services to the average consumer; rather, it diminishes the value of money, which can indirectly affect affordability.

Question 4

The costs to firms of changing prices are called

Accepted Answer

The costs to firms of changing prices are called menu costs, which refer to the costs of printing new menus, catalogs, price tags, and other marketing materials, as well as updating computer systems and training employees. These costs can be significant for firms, especially in a highly competitive market where prices need to be adjusted frequently.

Question 5

The costs to firms of changing prices are called menu costs.

Accepted Answer

This statement is true. Menu costs refer to the costs incurred by firms when they change their prices, including the costs of updating menus, price lists, advertising, and other materials.

Question 6

What are menu costs?

Accepted Answer

Menu costs refer to the costs incurred by a firm when it changes the prices of its products. These costs could include the cost of printing and distributing new menus, the cost of updating electronic systems, and the cost of advertising the new prices to customers. The other options are not accurate definitions of menu costs.

Question 7

Explain whether you agree or disagree with the following statement: "The reason that inflation is bad is because it increases the cost of living - the costs of goods and services we buy - without increasing income in general."

Accepted Answer

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Question 8

Which of the following do not suffer the costs of inflation?

Accepted Answer

Persons whose incomes rise more rapidly than inflation do not suffer the costs of inflation as their purchasing power increases. A, C, D, and E all suffer the costs of inflation in different ways.

Question 9

The problem with inflation is that as prices rise,consumers can no longer afford to buy as many goods and services.

Accepted Answer

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Question 10

If inflation is higher than anticipated which of the following is most likely to be true

Accepted Answer

When inflation is higher than anticipated, the real value of fixed-rate debt, such as student loans, decreases, making it easier to repay them with money that is worth less.

Question 11

If inflation is completely anticipated,

Accepted Answer

When inflation is completely anticipated, firms still incur menu costs, which are the costs associated with changing prices (such as reprinting menus, catalogs, and price lists). This is a loss that firms face even when inflation is expected.

Question 12

If inflation is anticipated,some effects of inflation on the redistribution of income can be avoided.

Accepted Answer

If inflation is anticipated, individuals and businesses can adjust their behavior and adjust their prices and wages accordingly, so the redistribution of income can be avoided or minimized. For example, workers may negotiate for higher wages to match anticipated inflation, and businesses may raise their prices in anticipation of increased costs. This can help maintain the relative distribution of income and avoid the negative effects of unexpected inflation.

Question 13

Inflation that is ________ than what is expected benefits ________ and hurts ________.

Accepted Answer

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Question 14

When the actual inflation rate turns out to be greater than the expected inflation rate,who gains - the borrower or the lender - and who loses? Explain why.

Accepted Answer

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Question 15

If inflation is unanticipated,no redistribution of income can occur.

Accepted Answer

If inflation is unanticipated, it can still lead to redistribution of income. For example, if prices rise but wages remain the same, those on fixed incomes or with savings will experience a decrease in purchasing power, while those with flexible incomes or assets like stocks or real estate may continue to see their wealth increase.

Question 16

Explain why you would rather be a borrower during a period of unexpected rising inflation,and a lender during a period of unexpected declining inflation.

Accepted Answer

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Question 17

There are no costs to inflation if it is fully anticipated.

Accepted Answer

Even if inflation is fully anticipated, there are still costs such as menu costs (the costs of changing prices), shoe leather costs (the costs associated with more frequent transactions or withdrawals of money), and the distortions it can cause in taxation and savings.

Question 18

Which of the following individuals would be most negatively affected by anticipated inflation?

Accepted Answer

A retired railroad engineer who receives a fixed income payment every month would be most negatively affected by anticipated inflation as the purchasing power of their fixed income payment would decrease with inflation.

Question 19

Describe how a lender can lose during inflation if the inflation is unanticipated and the loan is a fixed-interest-rate loan.How would a variable-interest-rate loan (one that adjusts over the contract period)eliminate these losses?

Accepted Answer

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Question 20

If inflation increases unexpectedly,then

Accepted Answer

When inflation increases unexpectedly, the value of money decreases, meaning the amount paid back by borrowers has less purchasing power than anticipated. This results in lenders receiving a lower real interest rate than they expected, as the real interest rate adjusts for inflation.

Quiz 5: Unemployment and Inflation