๐ Topic Summary
Inflation can be more than just an annoyance; it has real costs to businesses and consumers. Shoe-leather costs refer to the increased transaction costs caused by inflation, such as the effort people expend to reduce their money holdings. Menu costs are the costs to firms of changing prices. Finally, unit-of-account costs arise from the way inflation makes money a less reliable unit of measurement, complicating long-term planning and investment decisions.
๐งฎ Part A: Vocabulary
Match the term with its correct definition:
| Term |
Definition |
| 1. Shoe-leather Costs |
A. Costs of changing listed prices. |
| 2. Menu Costs |
B. The costs arising from the way inflation makes money a less reliable unit of measurement. |
| 3. Unit-of-Account Costs |
C. The increased costs of transactions caused by inflation. |
Answer Key: 1-C, 2-A, 3-B
โ๏ธ Part B: Fill in the Blanks
Complete the following paragraph using the words: Inflation, Menu, Shoe-Leather, Unit-of-Account.
High rates of __________ can erode the value of savings and investments, leading individuals to spend more time managing their assets, thus incurring __________ costs. Businesses facing frequent price changes must deal with __________ costs. Furthermore, __________ costs make long-term financial planning difficult because the real value of money becomes uncertain.
Answer Key: Inflation, Shoe-Leather, Menu, Unit-of-Account
๐ค Part C: Critical Thinking
Explain how technology might reduce the impact of menu costs in today's economy. Provide an example.
Sample Answer: Technology, like digital price tags and automated online updates, drastically reduces menu costs. For example, Amazon can change prices on millions of products almost instantly, eliminating the traditional costs of re-labeling and re-printing catalogs.