Short Answer Questions (answer in the space provided below): 1. Do you think tha

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Short Answer Questions (answer in the space provided below): 1. Do you think that inflation imposes a net cost to the economy after considering the gains and loss? If so, which type of cost? Discuss each scenario below a) (1 mark) Nobu gets paid more frequently and thus has to make more trips to the banks down the road, when inflation is expected to be high (1 mark) Nobu gets reimbursed by RMIT for his work-related expenses. However, sometimes it takes longer time to reimburse him (quite often in reality!). When inflation is expected to be high, he is less willing to travel for his job. b) c) (1 mark) Responding to unexpectedly high inflation, the manager of the Sofitel Hotel must reprint and resend expensive coloured brochures correcting the price of the accommodation in this season. (Answers)

Explanation / Answer

Ans.

Inflation imposes a net cost to the economy and is explained in the following situations.

a) Shoe leather cost

Shoe Leather costs are the costs of time and efforts that people spend trying to counter-act the effects of inflation. Such as in this situation of high expected inflation, Nobu gets paid more frequently and has to make additional trips to the bank. As a result he has to walk more , go to the bank and get cash. Which wears out his shoes more quickly. So it is known as shoe leather costs.

b) Unit - of - account costs

This costs arises from the way inflation makes money a less reliable unit of measurement. In this situation, when Nobu spends a dollar on work related expenses is worth more than a dollar he receives later in reimbursement from his company. He is willing to travel less for his job , so there is net loss to the economy for the output not being given by him.

c) Menu costs

Menu costs occurs during high iflation . When prices change due to inflation there are also minor costs of changing catalouges and price labels etc. In this situation manager of hotel has to reprint the brouchers regarding increasing price of accomodation , as in response to increased inflation. As a result there is menu costs.

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