ECON-2000 Lecture Notes - Lecture 30: Money Illusion, Real Wages
Document Summary
Costs of inflation: if long-term contracts don"t transpire, slows gdp. Shoe leather costs: as prices go up, it gets costlier to hold money. Menu costs: the cost of changing prices, ex: a restaurant will have to print new menus for all price changes (and other marketing) Uncertainty about future price levels: makes borrowing and lending riskier. Wealth redistribution: wealth can be redistributed between borrowers and lenders, actual inflation > estimated inflation: wealth transferred from lender to borrower, actual inflation < estimated inflation: wealth transferred from borrower to lender. Price confusion: difficulty analyzing whether price changes are a result of demand shifts or inflation. Tax distortions: capital gains taxes are taxes on the gains realized by selling an asset for more than its purchase price, problem: is the price due to an increase in the values of the good or inflation.
