Inflations Costs

econ

Nominal variables

money/price levels (have no effect on real variables in the long run)

Real variables

(physical units; amounts of things/stuff (unaffected by nominal variables in the long run)

Money is

neutral in the long run (output depends on real variables - education and raw materials)

Negative costs of inflation 

1. Shoeleather costs 

2. Menu costs 

3. Relative price changes 

4. General sense of confusion and inconvenience 

Shoeleather Costs

• Most people choose to keep money in banks rather than carry it

• More frequent trips to the bank/ATM

• Time, wear and tear on shoes and cars

Menu costs

• Changing price levels may require businesses to

1. Print new price list catalogs

2. Print new advertisements

3. Mail new prices to customers

4. Make adjustments to websites

Relative prices 

• If the price of one or a few things rise, some think ALL prices are rising 

• Incorrect perceptions become incorrect actions (trying to wait out higher price levels) 

• If consumer spending decreases= business cut back on production, leading to greater unemployment 

Confusion/Inconvenience

• Since money/prices are often used as a measure of “value” inflation can cause:

1. Incorrect perception of firms earnings/expenses

a. A company might make $100 million in profit each year- but inflation can make the real value of that money less

People may invest this company instead of others that are doing better in real terms which can be inefficient