ECO 1002 Lecture 20: ECO 8.3
Document Summary
Uncertainty about price changes creates problems for firms and workers. Consumers may change buying patterns due to uncertainty. The costs of inflation: future price level uncertainty. Firms often make long-term agreements that involve paying salaries to workers and paying loans on capital goods. Workers: fear of getting underpaid next year. Lenders: fear of lending out money today and getting paid back in less-valuable dollars next year. If long-term contracts don"t transpire, gdp growth is slowed. As prices go up, it becomes more costly to hold money as cash. Shoe-leather costs are resources that are wasted when people change behavior to avoid holding money. Additional time, effort, and fuel costs: money illusion. People interpreting nominal wage or price changes as real changes. If prices and wages all go up by 2%, there is no real change in your purchasing power. People with money illusion think they are richer in this case.
