Question

People go to the bank more frequently to reduce currency holdings when inflation is high. The sacrifice of time and convenience that is involved in doing that is referred to asa. inflation-induced tax distortion.b. relative-price-variability cost.c. shoeleather cost.d. menu cost

Answer 1

Answer:

c. shoe leather cost.

Explanation:

During times of high inflation, interest rates usually go up. Money in the banks earns higher interest compared to when inflation is low. When the inflation rate is high, the prices of goods and services increase rapidly, resulting in a reduction in currency's purchasing power.

Individuals and firms opt to keep as little cash in hand as possible. Holding a lot of cash at such times is not prudent as banks offer high-interest rates. Keeping cash become costly due to currency depreciation. As firms and households keep most of the money in banks, they incur a lot of transport costs and time going to banks to withdraw cash for normal expenses. The time and transport costs incurred are referred to as shoe leather costs.