Chapter 23, Problem 9P

To determine

To determine: If inflation is creating winners and losers at no cost to the economy or if inflation is imposing a net cost on the company in the given examples.

Concept Introduction

Inflation: Inflation refers to the rise in the prices of goods and services and on the other hand, it decreases the currency’s value. Inflation causes few economic costs which are listed as follows:

• Shoe-Leather Cost: People hold cash in hand and deposit cash in their bank accounts as well. When inflation rises and the value of money falls, people start to reduce the money they hold. This involves a cost which is known as shoe-leather cost.
• Menu Cost: When the inflation rises, the price of every good and service in the economy also rises. Then the producers need to change the prices listed on their products and services. This involves a cost which is known as menu cost.
• Unit-of-Account Cost: When the inflation rises, the value of currency falls. This implies that as the inflation rises from this year to next year, the value of currency will be less next year compared to this year. This involves a cost which is known as unit-of-account cost.