Inflation and deflation: Costs

Overview

Recall questions on Costs.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Why do borrowers benefit from inflation?

   Model answer

   Borrowers gain as the real value of their debt falls.

2. 2

   How does inflation affect those on fixed incomes?

   Model answer

   Those on fixed incomes lose purchasing power.

3. 3

   Which groups can protect themselves from inflation's redistributive effects?

   Model answer

   Those who can raise prices or wages maintain their real incomes.

4. 4

   How can inflation affect a country's international competitiveness?

   Model answer

   If domestic inflation exceeds that of trading partners, international competitiveness is reduced.

5. 5

   What are menu costs?

   Model answer

   Menu costs are the costs of changing prices, such as reprinting price lists and catalogues.

6. 6

   What are shoe-leather costs?

   Model answer

   Shoe-leather costs are the costs of economising on cash holdings, such as making more frequent trips to the bank.

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