Question

Below is a list of potential problems that inflation might cause. Use the space on the left to name each of these with the terms used in chapter 8. 15 points (2pts each, extra point if you get all of them right)

• ___________ Lenders and workers are reluctant to help firms produce output because the real value of future dollar payoffs is unclear.
• ___________  Workers make decisions on the basis of nominal rather than real wage changes.
• ­­­____________ Unexpected inflation reduces the real value of loan repayments.
• ____________  Firms cannot distinguish whether there is a change in the relative price of their good or a change in the overall price level.
• _____________Restaurants need to spend resources to alter the prices on their menus.
• _____________Individuals own stock shares for many years and then sell them and are required to pay taxes on the nominal capital gain.
• ______________People leave work early to shop before inflation changes prices
• 1.Shoe-leather costs 2.Money illusion 3.Menu costs 4.Uncertainty over future price levels 5.Wealth redistribution 6.Price confusion 7.Tax distortions

Answer 1

• Uncertainty over future price levels : Lenders and workers are reluctant to help firms produce output because the real value of future dollar payoffs is unclear.
• Tax distortions : Workers make decisions on the basis of nominal rather than real wage changes.
• Wealth redistribution : Unexpected inflation reduces the real value of loan repayments.
• Price confusion : Firms cannot distinguish whether there is a change in the relative price of their good or a change in the overall price level.
• Menu costs : Restaurants need to spend resources to alter the prices on their menus.
• Shoe-leather costs : Individuals own stock shares for many years and then sell them and are required to pay taxes on the nominal capital gain.
• Money illusion : People leave work early to shop before inflation changes prices.

Thanks!..