In each of the following scenarios, explain and categorize the cost of inflation

Question

In each of the following scenarios, explain and categorize the cost of inflation. A) Because of inflation has risen, the L.L Bean Company decides to issue a new catalog quarterly rather than annually. B)Grandma buys annuity for $100,000 from an insurance company, which promises to pay her $10,000 a year for the rest of her life. After buying it, she is surprised that high inflation triples the price level over the next few years. C)Maria lives in an economy with hyperinflation. Each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses its value. D) Warren lives in an economy with an inflation rate of 10%. Over the past few years, he earned a return of $50,000 oh his million dollar portfolio of stocks and bonds. Because his tax rate is 20%, he paid $10,000 to the government. E) Your father tells you that when he was your age, he worked for only $3 an hour. He suggest that you are lucky to have a job that pays $7 an hour. Is it Menu cost, shoe-leather cost or others.

Explanation / Answer

a. This is categorized under Menu Cots and an expected inflation; further, due to inflations, the firms has to print new menus on a regular basis or more frequently.

b. This is an unexpected inflation and is categorized under arbitrary redistribution of wealth or purchasing power between the creditors and debtors.

c. This can be categorized under shoe leather costs because Maria has to rush to the market upon the fear of losing value. The opportunity cost incurred in putting extra effort for getting the resources during hyperinflation is called show leather cost.

d. This is categorized under inflation induced tax distortions; this is because, the tax laws will not take into account the effects of inflation in formulating the taxes. In this example, 100% of the interest income has gone away in the form of taxes.

e. It is a Menu cost as the increase in prices accounted for higher pay or in other words, due to inflation the value of money has declined over the decade leading to an increase in nominal wage. However, the market consumption basket will be approximately same.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.