The question requires us to determine the change in the shoe-leather cost.
Explanation of Solution
Inflation represents a general increase in the prices of goods and services in the market, and the inflation rate represents the percentage rise in the overall price level in an economy in a given period of time.
Inflation imposes economic costs on the market. The major economic costs are:
- Unit of account cost
- Shoe-leather cost, and
- Menu cost.
Due to inflation, an increase in transaction costs in terms of the extra running around banks and ATMs when people attempt to avoid keeping money, are called "shoe-leather costs."
Technological advancement in the banking sector has made banking services easier to access for all individuals regardless of geographical region and economic status.
During inflation, the developments in the banking sector reduce the shoe-leather costs of the transaction, but they increase the other costs of transaction in the forms of merchants' cost of sending and receiving money online and other similar changes to get the banking services at our doors.
So, the shoe-leather costs of inflation may fall or rise based on the transaction costs.
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Chapter 14 Solutions
Krugman's Economics For The Ap® Course
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