Question : 12.3   The Cost of Inflation 1) High inflation A) leads to a : 1227867

12.3   The Cost of Inflation

1) High inflation

A) leads to a more correct allocation of resources.

B) lowers the price level.

C) decreases uncertainty.

D) makes it easier to use money as a standard of account.

E) makes money function less well as a store of value.

2) During an inflation, a household with savings of $100,000

A) gains because inflation increases the value of their savings.

B) loses because the inflation increases the after-tax real interest rate.

C) gains because the inflation gives savers more money and so more purchasing power.

D) loses because inflation increases the real tax on the interest paid.

E) neither gains nor loses because inflation does not affect savers.

3) One effect of inflation is that it is a tax that redistributes goods and services from

A) government to households.

B) investors to savers.

C) government to businesses.

D) households and businesses to the government.

E) businesses to households.

4) Inflation ________ the cost of holding money and ________ the after-tax real interest rate.

A) increases; increases

B) increases; decreases

C) decreases; increases

D) decreases; decreases

E) increases; does not change

5) Assume an economy begins with zero inflation, a 25 percent income tax rate, and a real interest rate of 4 percent. If inflation rises to 4 percent, the nominal interest rate becomes ________ percent and the after-tax real interest becomes ________ percent.

A) 0; 1

B) 8; 2

C) 8; 4

D) 6; 2

E) 8; 6

6) The “shoe-leather costs” of inflation are the costs from

A) higher prices for all goods, including necessities such as shoes.

B) the government taking a higher percentage of interest income.

C) confusion as people lose track of real costs and benefits.

D) time spent trying to spend money quickly.

E) higher taxes due to higher inflation.

7) Shoe-leather costs of inflation arise from the

A) increasing costs of apparel (clothes and shoes) as inflation rises.

B) increase of velocity as inflation rises.

C) decline in the use of money as a unit of account.

D) increasing costs of agricultural products as inflation rises.

E) confusion that results from higher inflation.

8) Because the inflation rate is so high Wanda refuses to carry cash. Even though it is a bother, she now goes to the ATM twice as often to get the cash she needs. Wanda’s actions are an example of the

A) shoe-leather costs of inflation.

B) tax costs of inflation.

C) confusion costs of inflation.

D) uncertainty costs of inflation.

E) tax distorting costs of inflation.

9) If inflation is making it difficult for people to estimate the true marginal benefits and true marginal costs of activities, inflation is leading to

A) tax costs.

B) shoe-leather costs.

C) confusion costs.

D) uncertainty costs.

E) increased economic growth.

10) Uncertainty costs arise from inflation because inflation makes long-term planning ________ so people respond by ________ investment.

A) more difficult; increasing

B) more difficult; decreasing

C) less difficult; not changing

D) more difficult; not changing

E) less difficult; increasing