In each of the following scenarios, explain and categorize the cost of inflation

Question

In each of the following scenarios, explain and categorize the cost of inflation:

a. Because inflation has risen, the Armani clothing company decides to issue a new catalog monthly rather than quarterly

b. Grandpa buys an annuity for 100,000 from an insurance company which promises to pay him 10,000 a year for the rest of his life. After buying it , he is surprised that high inflation triples the price level over the next few years

c. Maria lives in an economy with hyperfinflation. Each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses value.

d. Gita lives in an economy with an inflation rate of 10 percent. Over the past year she earned a return of 50,000 on her million dollar portfolio of stocks and bonds. Because her tax rate is 20 percent, she paid 10,000 to the government

e. Your father tells you that when he was your age he worked for only 4 dollars an hour. He suggests that you are lucky to have a job that pays 9 dollars an hour.

Explanation / Answer

a) Menu cost: In this case the cost of inflation is menu cost (cost to the firm because of change in its price menu) as they have to invest on a new catalogue every month now which was quaterly before.

b) Loss of purchasing power : In this case the cost of inflation is loss of purchasing power. It is because Grandpa will be able to buy less now with same amount of money i.e. money is losing itss value and so purchasing power has decreased.

c) Shoeleather cost : In this case the cost of inflation is shoeleather cost. this name came from the fact that extra trips will use the shoe leather quickly. We see that Maria makes several trips to supermarket so extra money and cost of travel and time wasted is the cost of inflation here.

d) Redistribution of wealth : Despite of earning interest every year we see that actual purchasing power is decreasing as inflation is higher than interest earned. So the cost of inflation is the decrement of wealth of Gita.

e) Loss of purchasing power : In this case the cost of inflation is loss of purchasing power. It might look to my father that i am earning more than double but actually if we factor inflation my overall purchasing power is less than his.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.