ECON 102 Chapter Notes - Chapter 2: Seigniorage, Menu Cost, Nominal Interest Rate
Document Summary
Projected inflation costs: consider the case of expected inflation first. Suppose the price level increased by 1 percent per month. What will be the social costs of such a constant and predictable 12 percent annual inflation: one disadvantage is distorting the sum of money people keep from inflation tax. A higher inflation rate, as we have already discussed, results in a higher nominal interest rate, which in effect leads to lower real money balances. When people want to keep smaller money balances on average, they have to make more regular visits to the bank to withdraw money for example, they would withdraw twice a week instead of once a week. Changing prices are sometimes expensive: for example, printing and distribution of a new catalog may be required. For example, suppose each january a company issues a new catalogue.
