Question

For each of the following events determine the costs of inflation and explain it:

a) Due to the increased inflation, Blue Effect, Ltd. decided to publish a new catalog quarterly instead of annually.
b) A grandmother gets her pension amounting to CZK 10,000 per month until the end of her life from the First retirement Inc. She is surprised that due to high inflation the price level has tripled within a few years.
c) Mary lives in an economy with hyperinflation. On the days she gets paid at work she quickly runs to the store and spends her earnings as fast as she can.
d) Josef lives in an economy with an inflation rate of 10%. Over the last year he earned CZK 50,000 from his one million investments in stock. The tax rate is 20 percent, thus he paid CZK 10,000 in taxes.
e) Your father is telling you that when he was as old as you are now, he worked for an hourly wage of CZK 30. He argues that you are better off when you are paid CZK 100 per hour.

Answer 1

The costs of inflation in different scenarios include additional expenses, decreased purchasing power, loss of value of earnings, and decreased real value of investments.

Step-by-step explanation:

a) Due to the increased inflation, Blue Effect, Ltd. decided to publish a new catalog quarterly instead of annually. The cost of inflation in this case is the additional expenses incurred by the company in printing and distributing catalogs more frequently.

b) The cost of inflation for the grandmother in this case is the decrease in her purchasing power. With high inflation, the price level has tripled, meaning her pension of CZK 10,000 per month can buy fewer goods and services.

c) In an economy with hyperinflation, the cost of inflation for Mary is the loss of value of her earnings. By quickly spending her earnings, she is trying to prevent them from losing value due to hyperinflation.

d) The cost of inflation for Josef is the decrease in the real value of his investment returns. With an inflation rate of 10%, his CZK 50,000 earnings from investments are eroded by inflation. After paying CZK 10,000 in taxes, the real value of his earnings is reduced further.

e) The cost of inflation for your father's argument is the decrease in the purchasing power of the CZK. If he was earning CZK 30 per hour in the past and now you are earning CZK 100 per hour, it suggests that the cost of goods and services has increased over time due to inflation.