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 Because inflation has risen, the Armani clothing company decides to issue a new catalog monthly rather than quarterly 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 Maria lives in an economy with hyperinflation. Each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses value. 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 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.

Since the firm is changing its catalog every month, it increases the firm's costs.

(b) Income re-distribution

By reducing the value of Grandpa's saving, inflation has re-distributed income from the saver to the borrower.

(c) Shoe-leather cost

This is incurred by people frequenting banks or stores more often to combat the fast-reducing loss of value of money.

(d) Fiscal drag.

This cost arises when tax paid rises with rising inflation.

(e) Loss of purchasing power

$4 purchased more during father's working days, than what $9 purchases for me.

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