Question 1

What Is unanticipated inflation?

Accepted Answer

Inflation that is not expected, meaning that consumers and producers could not adjust in advance

Question 2

What are menu costs?

Accepted Answer

Menu costs are costs associated with firms changing prices, such as the cost of reprinting menus or changing prices on a website

(e.g., Walmart hiring worker to replace price tags)

Question 3

What are shoe leather costs?

Accepted Answer

The cost of time and effort that people end up spending to counteract the effects of inflation

(e.g., needing to make more trips to the bank because you have less money with you)

Question 4

What is the loss of purchasing power due to inflation?

Accepted Answer

Inflation decreases a currency's purchasing power (how much it can buy)

This means people must spend more money to buy the same goods and services

Question 5

What is wealth redistribution as a cost of inflation?

Accepted Answer

Some people benefit from inflation, while others are hurt by it

People, who hold assets or have fixed incomes may suffer from inflation, while those who are debtors may benefit

Question 6

What are the costs associated with unanticipated inflation?

Accepted Answer

The costs associated with unanticipated inflation include menu costs, shoe leather costs, loss of purchasing power, and wealth redistribution for some

Question 7

How does inflation affect lending and borrowing?

Accepted Answer

When people are considering lending or borrowing money, they will take into consideration the expected inflation rate. If that inflation rate turns out to be different than anticipated, that affects the amount of interest that is repaid or earned.

Question 8

What is the effect of inflation on wages?

Accepted Answer

Individuals who have the same wage next year as they do currently will not be able to purchase as much due to inflation

Question 9

What happens to borrowers with fixed Interest rates when inflation occurs?

Accepted Answer

Unanticipated inflation can reduce the real value of the debt, benefiting the borrowers

(borrowers with variable interest rates may not be helped because the interest rates will increase to compensate for inflation)

Question 10

How can unanticipated inflation benefit owners of assets?

Accepted Answer

Their assets will have a higher nominal value due to inflation

Question 11

What is the nominal value of an asset?

Accepted Answer

The monetary value of an asset, not adjusted for inflation.

Question 12

What is the real value of an asset?

Accepted Answer

The value of an asset adjusted for inflation.

Question 13

How does unanticipated inflation affect the nominal value of an asset?

Accepted Answer

It can increase the nominal value of the asset even if its real value does not change.

Question 14

What is the difference between nominal and real wages?

Accepted Answer

Nominal wages are the monetary wages paid to workers, while real wages are the purchasing power of those wages after adjusting for inflation.

Question 15

What is the effect of inflation on workers on fixed incomes?

Accepted Answer

It can lead to a decline in their standard of living

(e.g., people living on pensions or disability benefits)

Question 16

What happens if the income of workers on fixed incomes does not increase at the same rate as inflation?

Accepted Answer

They may find it difficult to keep up with rising prices, worsening their economic situation

Question 17

How are savers hurt by inflation?

Accepted Answer

The value of their savings is decreased due to inflation, as money becomes less valuable

(savers may invest in stocks or bonds to combat this)

Question 18

How can inflation hurt borrowers with variable interest rates?

Accepted Answer

Inflation will cause lenders to increase interest rates, hurting the borrowers

2.5 Costs of Inflation, AP Macroeconomics Flashcards