Answer to Question #309972 in Macroeconomics for xyouwf_

Question

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

a. Because inflation has risen, the J. Crew clothing company decides to issue a new catalog monthly rather than quarterly.

b. Grandpa buys an annuity for $100,000 from an insurance company, which promises to pay him $10,000 a year for the rest of his life. After buying it, he 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 value.

d. Gita lives in an economy with an inflation rate of 10 percent. Over the past year, she earned a return of $50,000 on her milliondollar portfolio of stocks and bonds. Because her tax rate is 20 percent, she paid $10,000 to the government.

e. Your father tells you that when he was your age, he worked for only $4 an hour. He suggests that you are lucky to have a job that pays $9 an hour

Answer 1

A) Because inflation has risen, the J. Crew clothing company decides to issue a new catalog monthly rather than quarterly.

Menu cost: when inflation goes up, a company must increase prices, creating a need to distribute more catalogs.

B) Grandpa buys an annuity for $100,000 from an insurance company, which promises to pay him $10,000 a year for the rest of his life. After buying it, he is surprised that high inflation triples the price level over the next few years.

Unexpected inflation: a high inflation increase lowers how much money he gets back.

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 value.

Shoe leather cost: when money is constantly reducing value.

D) Gita lives in an economy with an inflation rate of 10 percent. Over the past year, she earned a return of $50,000 on her million-dollar portfolio of stocks and bonds. Because her tax rate is 20 percent, she paid $10,000 to the government.

Tax laws

E) Your father tells you that when he was your age, he worked for only $4 an hour. He suggests that you are lucky to have a job that pays $9 an hour.

Inconvenience since price level is constantly changing