Question

For each of the following separate situations, determine the associated cost of inflation.

(1) shoe-leather costs; (2) money illusion; (3) menu costs; (4) future price level uncertainty; (5) wealth redistribution; (6) price confusion; or (7) tax distortions.

(Explanations are not required)

1. Wages of computer scientists always rise because our economy needs more and more computer scientist over time.
2. A grandpa talked to his grandson, “When I was young, everything was so cheap. Now everything is too expensive.”
3. Mary does not want to lend money to Simon even though Simon will pay her an interest rate of 3% per year.
4. Tom does not like withdrawing money from an ATM as he always forgets the password.
5. Frankie can make a huge gain if she sells her house, but she is not willing to do so.
6. Carlos sells pizzas. He has kept the prices constant for 3 years even though CPI has been increasing tremendously.

Answer 1

a) Price confusion

b) Money Illusion

c)  Future price level uncertainty

d)  Shoe-leather costs

e) Tax Distortion

f) Menu Cost