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UGBA+101B+-+Homework+5

# UGBA+101B+-+Homework+5 - 2 What if any are the costs of...

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UGBA 101B Homework #5 Due: February 28, 9:30AM 1. How do the costs of inflation depend on whether it is anticipated, unanticipated, or variable? The costs of inflation do depend on whether it is the anticipated, unanticipated or variable. The costs of anticipated inflation are not extremely high because people are already expecting the inflation. The shoeleather cost is one important cost because people have to still go to the bank more frequently to withdraw money. There are still menu costs of changing the prices. The costs of unanticipated inflation is high because in this scenario, the creditors are afraid to lend to the debtors because they are afraid the inflation rate will change. Variable inflation has a great cost because people have to spend time examining the daily inflation and the changes.
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Unformatted text preview: 2. What, if any, are the costs of deflation? There are similar menu costs. Also deflation affects the government’s revenue. There is likely to be a loss of government revenue since tax is based on nominal incomes, and deflation may lead to a decrease in spending power when there is no change in purchasing power. 3. What is the nominal interest rate in the United States today? What is the real interest rate? Note : This is a trick question. State some assumptions and answer it. The nominal interest in the United States is 0.25. The assumption is that the real interest rate is different from the nominal interest rate imply the bank is making a rate. I=r+E(pi). This is assuming the bank is making a r rate from using the nominal interest rate....
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