Chapter 8

Question 1

What are two benefits of inflation?

Answer 1

1. It leaves room for the central bank to implement expansionary monetary policy in a recession
2. makes it easier for firms to adjust real wage to changes in the labour market

Question 2

What are the costs of perfectly anticipated inflation? (3 things)

Answer 2

1. Shoe leather costs
2. Menu costs
3. Tax distortions

Question 3

When contracts are written in nominal terms, if inflation is unexpectedly high …

Answer 3

debtors repay loans in cheaper dollars

Question 4

When contracts are written in nominal terms, if inflation is unexpectedly low …

Answer 4

debtors pay loans in more valuable dollars

Question 5

How unanticipated inflation can be usefull?

Answer 5

redistributes wealth and income

Question 6

What is wealth redistribution?

Answer 6

the redistribution of all assets fixed in nominal terms caused by unexpected inflation

Question 7

What is indexing?

Answer 7

A bond is indexed when when coupon payments or the principal move with inflation

Question 8

What are floating rate notes?

Answer 8

coupon rates that are reset periodically to changes in market interest rate