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Unformatted text preview: valuable. Thus, inflation is like a tax on everyone who holds money. When the government has high spending, inadequate tax revenue, then printing dollars is the easiest way to pay for its spending. Massive increase in the quantity of money leads to massive inflation. 5. According to the Fisher effect, increase in inflation rate does not affect real interest rate because real interest rate is real variable. The nominal interest rate must adjust one-for-one to changes in the inflation rate resulting in a higher inflation rate and higher nominal interest rate in the long run. 6. Costs of inflation are shoeleather costs, which are the resources wasted when inflation encourages people to reduce their money holdings, and menu costs which are costs of changing prices. 7. If inflation is less than expected, it is beneficial to creditors. Less than expected inflation will enrich creditors at the expense of the debtors because it increases the real value of the debt....
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This note was uploaded on 06/20/2011 for the course ECON 123 taught by Professor Mrews during the Spring '11 term at Korea Advanced Institute of Science and Technology.
- Spring '11