Question

15. Menu Costs and Winners and Losers from Inflation Aa Aa Assume the following table gives the inflation rates in the year 2009 and average inflation rates over the period 2010-2017 for four different countries Average Inflation Rate in 2010-2017 (%) 6.70 0.25 18.51 2.40 Difference between Actual and Expected Inflation Rates (%) Inflation Rate in 2009 (%) 7.06 -0.78 55.03 3.37 Winners or Losers from Inflation Country Given the expected relationship between average inflation and menu costs, the country with the lowest menu costs over the 2010-2017 period is Consider 10-year loans agreed upon in each country in 2009 with the expectation that the inflation rate for 2010 to 2017 would be the same as the inflation rate in 2009. Complete the table by computing the difference between the actual and expected inflation rates for each country. (Hint: Round your answers to the nearest hundredth.) A high inflation rate imposes overall costs on the economy. In addition to the overall costs inflation imposes on an economy, inflation produces winners and losers within the economy. Use the dropdown boxes in the 'Winners or Losers from Inflation' column for each country to indicate whether borrowers or lenders benefit from inflation Based on your calculations, the country in which borrowers with 10-year loans taken out in 2009 gained the most due to inflation is

Winner/Loser options are: Lenders or Borrowers.

Answer 1

(1) The higher (lower) the average inflation rate, the higher (lower) the menu cost. Therefore, country with lowest menu cost is country E.

(2) When Actual inflation is higher than (lower than) Expected inflation, Borrowers (Lenders) gain and Lenders (Borrowers) lose.

Country	Inflation Rate in 2009 (%)	Average Inflation Rate (%)	Difference b/w Actual & Expected Inflation (%)	Winners/Losers
	(A)	(B)	= (A) - (B)
A	7.06	6.7	0.36	Borrowers Gain
E	-0.78	-0.25	-0.53	Lenders Gain
G	55.03	18.51	36.52	Borrowers Gain
C	3.37	2.4	0.97	Borrowers Gain

(3) Difference between Actual & Expected Inflation rate is highest for country G. So, borrowers gain most in country G.