Which of the following is not a cost created by high inflation? A. Inflation causes the real wage to fall which means that firms have to pay more for workers. B. Inflation causes the real interest rate to change which can make it more difficult to borrow and lend money. C. Inflationary impacts are not distributed evenly across the population, therefore, inflation causes the economy to redistribute income across households. D. Inflation changes firms' prices which causes firms to have to use resources to physically change the marked prices, often referred to as menu costs.
Business · High School · Wed Jan 13 2021
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The option that is not a cost created by high inflation is A. Inflation causes the real wage to fall which means that firms have to pay more for workers. This statement is actually incorrect; during periods of high inflation, if nominal wages remain constant or do not increase at the same rate as inflation, the real wages (purchasing power of the wages) would fall, not increase. Therefore, firms wouldn't have to pay more for workers in terms of real wages; they might pay more in nominal terms but less in real terms, as each unit of currency is worth less in terms of purchasing power.