Question

Which of the following is/are true about the costs of inflation?

1. Over the long run, the price level is just a number with no real costs.
2. Inflation erodes the purchasing power of my income, making me poorer.
3. Inflation increases the cost of doing business - like making contracts and printing menus
4. Inflation increases the cost of managing your money - like going to the ATM more often to withdraw money
5. Unexpected increases in inflation transfer wealth from lenders to debtors while unexpected decreases in inflation transfer wealth from debtors to lenders.

Answer 1

• Option B
• Option C
• Option D
• Option E

Explanation: Inflation erodes value of wealth. It also increases the cost of doing business and the cost of managing money. Unexpected inflation benefits borrowers at the cost of creditors.