Question 1

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

Accepted Answer

Menu costs refer to the costs incurred by a firm in changing its prices, such as the cost of updating price tags or printing new menus.

Question 2

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 are not able to adjust their behavior in response to the inflation, resulting in greater income redistribution. When inflation is anticipated, individuals and businesses can take steps to protect themselves from the effects of inflation, such as negotiating higher wages or investing in assets that hold value during inflation.

Question 3

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

Accepted Answer

If inflation is anticipated, individuals can adjust their wages and prices accordingly, potentially avoiding the negative effects of inflation on the redistribution of income. For example, workers can negotiate higher wages that account for expected inflation, and businesses can increase their prices to account for higher input costs caused by inflation.

Question 4

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

Accepted Answer

The answer of The problem with inflation is that as...

Question 5

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 6

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

Accepted Answer

The answer of Describe how inflation can be costly even...

Question 7

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

The answer of When the actual inflation rate turns out...

Question 8

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 loses?

Accepted Answer

The answer of Describe how a lender can lose during...

Question 9

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

Accepted Answer

Unanticipated inflation can lead to redistribution of income as some individuals may benefit while others may lose out depending on how they are positioned in the economy. For example, individuals with fixed income or savings may experience a decrease in their purchasing power, while those with variable income or debt may experience an increase in their purchasing power.

Question 10

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

The answer of Explain whether you agree or disagree with...

Question 11

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

The answer of Explain why you would rather be a...

Quiz 20: Unemployment and Inflation