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Homework answers / question archive / 1) Which of the following is a cost of inflation? relative price variability
1) Which of the following is a cost of inflation?
relative price variability.
shoeleather costs.
menu costs.
All of the above are correct.
2) Part of the argument against deficits is that they
increase interest rates and investment.
decrease interest rates and increase investment.
decrease interest rates and investment.
increase interest rates and decrease investment.
Answer:
1.
All of the above are correct
Relative price stability, menu cost and shoe leather cost are all cost of inflation.
2.
Deficit refers to the state where the government expenditure exceeds it's revenues. Leading to state of financial debt for the government.
Due to financing this Deficit the government sells the government bonds which increases money supply and hence raising the cost of borrowing and so the Interest rates rises.
As we know with a rise in interest rates the lending cost rises leading to less investment by firms and industries.
So there is an increase in interest rates and a decrease in investment.
Hence, Option D) is correct
