Chapter 14, Problem 4MCQ

To determine

The question requires us to determine the type of cost.

Explanation of Solution

The economy experiences unit-of-account costs of inflation when inflation makes money a less reliable unit of measurement. Inflation lowers the value of money by lowering its purchasing power, which means a dollar can buy more goods this year than the next year. Inflation generates the unit-of-account costs on the use of dollars because the dollar is considered the basis of the contract and is more reliable.

This inflation cost can be seen in the context of the tax system also when inflation impacts the measurement of income on which tax has been imposed.

Thus, option “d” is correct.

The other options are incorrect because:

1. The price level is not saying anything about the costs of inflation.
2. 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."
3. 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.

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.