Multiple Choice
Which of the following statements best explains how even low levels of inflation can negatively affect real output?
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11. Unemployment and Inflation
Costs of Inflation: Shoe-leather Costs and Menu Costs
Multiple Choice
In macroeconomics, shoe-leather costs arise when higher inflation rates induce people to do which of the following?
A
Change posted prices more frequently because printing and updating price lists becomes more costly
B
Experience higher unemployment because inflation reduces the demand for labor
C
Pay higher real interest rates because inflation raises the real cost of borrowing
D
Hold smaller real money balances and make more frequent trips to the bank or ATM to manage cash
Verified step by step guidance1
Understand the concept of shoe-leather costs: These costs refer to the increased effort and time people spend to reduce their holdings of cash when inflation is high, because holding cash means losing purchasing power.
Recognize that higher inflation reduces the real value of money held, so people try to minimize cash holdings to avoid this loss.
Identify that to hold less cash, individuals need to make more frequent trips to banks or ATMs to withdraw smaller amounts of money as needed.
Note that this behavior leads to increased 'shoe-leather' costs, metaphorically representing the wear and tear from more frequent trips.
Conclude that shoe-leather costs are about managing cash balances more actively, not about changing prices, unemployment, or real interest rates.
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