Chapter 14, Problem 3MCQ

To determine

The question requires us to determine the type of cost.

Explanation of Solution

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."It causes people to convert their dollars into different assets so that they avoid the losses caused by inflation because inflation lowers the purchasing power of each dollar.

So, people prefer to keep their money in banks and other assets with a higher return. To do so they run around the banks and markets. This imposes some costs of the transaction on them.

Thus, option “b” is correct.

The other options are incorrect because:

a. The price level is not saying anything about the costs of inflation.

c. A menu cost is a real expense associated with changing a quoted price. For instance, to alter a price in a grocery shop, a clerk may need to alter the price written next to the item on the shelf and an office assistant may need to alter the price written on the store's computer.

d. The economy experiences unit-of-account costs of inflation when inflation makes money a less reliable unit of measurement.

Economics Concept Introduction

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.