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Costs of Inflation

AP Macro - 2.5AP Micro - 2.5

Inflation causes shoe-leather costs, menu costs, redistribution from lenders to borrowers when unanticipated, and distortion of price signals and taxes.

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Practice Questions: Test Your Understanding

Apply what you've learned with these practice questions. These questions test your understanding of the key concepts.

Question 1 of 3

Which group is most likely to be negatively impacted by unanticipated inflation?

Borrowers with fixed-interest rate loans.

Individuals whose wages are indexed to the CPI.

The government, due to increased tax revenue.

Lenders providing loans at fixed interest rates.

Owners of real estate.

Key Takeaways

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Shoe-leather and menu costs: Resources spent minimizing cash holdings and updating prices.
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Redistribution: Unanticipated inflation hurts lenders (fixed nominal interest) and helps borrowers.
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High inflation distorts relative prices and tax brackets, creating uncertainty and inefficiency.