Question

In each of the following scenarios, explain and categorize the cost of inflation.a) Because inflation has risen, the J.Crew clothing company decides to issue a new catalog monthly rather than quarterly.b) Grandpa buys an annuity for $100,000 from an insurance company, which promises to pay him $10,000 a year for the rest of his life. After buying it, he is surprised that high inflation triples the price level over the next few years.c) Maria lives in an economy with hyperinflation. Each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses value.d) Gita lives in an economy with an inflation rate of 10%. Over the past year, she earned a return of $50,000 on her million-dollar portfolio of stocks and bonds. Because her tax rate is 20%, she paid $10,000 to the government.e) Your father tells you that when he was your age, he worked for only $4 an hour. He suggests that you are lucky to have a job that pays $9 an hour.

Answer 1

Answer:

Consider the following explanation

Explanation:

a) J. Crew is issuing its catalogs monthly in response to inflation. This will incur cost and it is known as 'Menu Cost'.

b) Grandpa has bought annuity which has promised $10,000 a year for the rest of his life. However, higher than expected inflation means grandpa has lesser purchasing power. This is loss of purchasing power and also 'redistribution cost'. In higher inflation borrower tends to get benefit. Here insurance company is at the gain.

c) Maria is witnessing loss of purchasing power because of hyper inflation. In such scenario, cost keeps rising and product's price could be higher a few hours later. This was witnessed in Germany as well as in Zimbabwe. People run to the stores as soon as they get cash or salary. It is known as 'shoe leather cost'. People make frequent trips to banks or stores but do not keep cash in fear of losing value.

d) Gita actually earned only 5% on her portfolio but as her income is in taxable bracket so she has to pay 20% tax. Her income from portfolio not even compensated inflation. This is a redistribution cost and also known as fiscal drag. More people fall into bracket because higher nominal income but real income is neglected which makes people worse off.

e) Father thinks that son is earning far more than him but inflation over the period of time erodes purchasing power and it could be possible that current income might be lower, same or higher comparing to inflation data. However, if it is lower then it is obviously loss of purchasing power.