ECON 102 Lecture Notes - Lecture 12: Gdp Deflator, Market Basket, Weighted Arithmetic Mean
Document Summary
Costs of uncertainty due to difficulty in contracting. Another widely emphasized cost of inflation is also linked to the fact that people make contracts in money terms that operate over time. When inflation is variable, it is hard to engage in such contracts. For example, consider a lender who finances an automobile purchase over five years. If she does not know what the inflation rate will be, it will be very difficult to know what kind of payments she should require. When this kind of uncertainty rises, the amount of financial contracting in the economy is likely to decline. It then becomes more difficult for consumers to finance large purchases (like housing and cars). Perhaps more important, it becomes more difficult for firms to finance their acquisition of new productive assets. These changes weaken the economy. (a) extreme chaos of hyperinflation. In the u. s. , these problems have not been negligible.
