Inflation imposes many costs on the economy: shoe-leather costs, money illusion, menu costs, wealth redistribution, price confusion, future price level uncertainty, and tax distortions. For each of the following statements, determine the associated cost.
a. A jeweler observes the price of gold rise and wonders if there is a shortage of gold.
b. Carson is angry because the price of donuts increased from $1 to $2 since last week
c. Your grandmother's savings account pays 2% interest, but inflation is 5%.
d. The CEO of GM worries that his revenue received in the future won't cover the expenses he incurs today.
e. Jim is reluctant to sell his stocks at the end of the year.
f. John thinks his new salary in NYC will increase his standard of living
g. Kallie is taking more trips to ATM now that the post.
Categories:
1. Shoe leather cost
2. Money ilusion
3. Menu costs
4. Wealth redistribution
5. Price confusion

1. Shoe leather cost = costs of time and efforts spent on trying to negate the effects of inflation. People incur this cost by holding less cash while others make additional trips to the bank.

2. Money illusion costs = cost of calculating and comparing the rising costs triggered by inflation can cause changes in the nominal price to be mistaken for changes in the real price.

3. Menu costs = During inflation, more time and cost are incurred to effect the un-ending price changes.

4. Wealth redistribution costs: In trying to redistribute wealth, there are some associated costs and unintended leakages.

5. Price confusion costs: During inflation, the changes made in prices may not be determined as resulting from either inflation or increased demand.