Question

4. The costs of inflation and of combating inflation The following graph shows a short-run Phillips curve for a hypothetical economy. Show the short-run effect of a contractionary monetary policy by dragging the point along the short-run Phillips curve (SRPC) or shifting the curve to the appropriate position. ? 12 11 10 SRPC 8 4 SRPC 3 2 1 0 1 4 5 UNEMPLOYMENT (Percent) INFLATION RATE Percent) Now, show the long-run effect of a contractionary monetary policy by dragging either the short-run Phillips curve (SRPC), the long-run Phillips curve (LRPC), or both 12 LRPC 11 SRPC 10 LRPC 7 6 SRPC 2 6 5 3 2 0 UNEMPLOYMENT (Percent) illustrating that the cost of fighting inflation is and the short-run Phillips curve shifts As expected, inflation INFLATION RATE (Perceny Which of the following is an example of a cost of inflation? Check all that apply. Increased variability of relative prices A general decrease in purchasing power A restaurant's costs to reprint its menu to reflect fluctuating prices An unintended redistribution of wealth from borrowers to lenders

Answer 1

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Cost of inflation : A general decrease in purchasing power , Menu cost .

( During high inflation lenders are losers and borrowers are gainers )

Answer 2

 The costs of inflation and of combating inflation

The following graph shows a short-run Phillips curve for a hypothetical economy.

Show the short-run effect of a contractionary monetary policy by dragging the point along the short-run Phillips curve (SRPC) or shifting the curve to the appropriate position.

Points:

1 / 1

Close Explanation

Explanation:

The short-run Phillips curve traces the intersections of a shifting aggregate demand curve along a fixed short-run aggregate supply curve. Contractionary monetary policy raises interest rates, reducing investment and aggregate demand. The result is a decrease in output and a decrease in the price level, which translates to a downward movement along the short-run Phillips curve. The economy will suffer more unemployment but will enjoy a lower rate of inflation.

Now, show the long-run effect of a contractionary monetary policy by dragging either the short-run Phillips curve (SRPC), the long-run Phillips curve (LRPC), or both.

Points:

1 / 1

As expected, inflationfalls    and the short-run Phillips curve shiftsdownward   , illustrating that the cost of fighting inflation istemporary unemployment   .

Points:

0.67 / 1

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Explanation:

Initially, the contractionary monetary policy moves the economy along the short-run Phillips curve. Unemployment increases and inflation decreases. As individuals and firms come to expect lower inflation, workers accept lower wage increases, and businesses do not raise prices as quickly. This development increases the willingness of firms to produce goods, shifting the short-run Phillips curve downward. The inflation rate remains low and the unemployment rate returns to the natural rate of unemployment. Policymakers have successfully lowered inflation, at the cost of a temporary increase in unemployment.

Which of the following is an example of a cost of inflation? Check all that apply.

A clothing store's need to change the price tags more frequently on goods sold in the store

Decreased variability of relative prices

An increase in shoe leather costs as consumers attempt to reduce their monetary holdings

A general decrease in purchasing power

Points:

0.25 / 1

Close Explanation

Explanation:

Economists have identified several costs of inflation. Higher inflation typically results in consumers making more frequent trips to retrieve cash, also known as the shoe leather costs associated with reduced money holdings. Businesses suffer by having to adjust their prices more frequently, resulting in higher menu costs. An unintentional distribution of wealth from lenders to borrowers also occurs as a dollar paid back in the future becomes less and less valuable compared to today, due to increased inflation lowering the real interest rate. Lastly, inflation also leads to increased variability in relative prices.

Inflation does not reduce or increase general purchasing power. While higher prices hurt buyers and help sellers, most people are both buyers and sellers. Not every individual will have the costs of paying higher prices exactly offset by the benefits of selling their services, such as labor, at a higher price, but this will happen in the aggregate.