ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The costs of anticipated inflation may include: Costs to firms-called menu costs as firms will need to keep changing their prices. Costs to individuals-shoe-leather costs-we will be less likely to hold as much cash, as it loses its value quicker when there is inflation.

Detailed explanation-2: -Unexpected inflation leads to high-risk premiums and economic uncertainty. With higher uncertainty, lenders ask for a premium to compensate for the uncertainty. This leads to higher costs of borrowing, hence reducing economic activity because it discourages investments.

Detailed explanation-3: -The main result, that an increase in anticipated inflation causes housing prices to rise, holds under the much weaker condition that real, aftertax interest rates decline with an increase in anticipated inflation.

Detailed explanation-4: -In general, the cost of inflation to an economy will be larger the higher the rate of inflation, the more variable the rate, the less it is anticipated, the greater is the uncertainty it causes, and the less indexed is the economy.