2. Do you think that inflation imposes a net cost to the economy after consideri

Question

2. Do you think that inflation imposes a net cost to the economy after considering the gains and loss? If so, which type of cost? Discuss each scenario below.

a) (1 mark) Nobu gets paid more frequently and thus has to make more trips to the banks down the road, when inflation is expected to be high.
b) (1 mark) Nobu gets reimbursed by RMIT for his work-related expenses. However, sometimes it takes longer time to reimburse him (quite often in reality). When inflation is expected to be high, he is less willing to travel for his job.
c) (1 mark) Responding to unexpectedly high inflation, the manager of the Sofitel Hotel must reprint and resend expensive coloured brochures correcting the price of the accommodation in this season.

Explanation / Answer

Yes, inflation imposes a net cost to the economy after considering the gain or loss.

A) This is an example of the effect of shoe - leather costs, a net cost of inflation to the economy. Nobu spend valuable resources going to the bank more frequently,
firms spend valuable resources (such as bookkeepers’ time) in paying Nobu ( and other workers) more frequently, and banks spend more resources in processing the greater volume of transactions.
b. This is an example of unit-of-account costs. A dollar when Nobu spends it on a work - related expense is worth more than a dollar he receives much later in reimbursement from RMIT. Because he is less willing to travel for his job, there is a net cost to the economy of his forgone output.
C This is an example of menu costs, a net cost of inflation to the economy. The manager of Sofitel Hotel must reprint and resend an expensive brochure because it is necessary to raise the price of rentals due to unexpectedly high
inflation.

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