Definition

Inflation means a sustained increase in the aggregate or general price level in an economy (Gans, King, Stonecash & Mankiw, 2005, p.640).

“Inflation means that your money wont buy as much today as you could yesterday.”
(Macklem, 2007)

The costs of inflation

1. Shoe-leather Costs

Shoe leather cost refer to the cost of time (more specifically the opportunity cost of time and energy) that people spend trying to counter-act the effects of inflation, such as holding less cash and having to make additional trips to the bank (Gans et al, 2005, p.653). The term comes from the fact that more walking is required (historically, although the rise of the internet has reduced it) and thus wearing out their shoes. This cost is known as shoe leather costs.

2. Menu Costs

Costs of price adjustment are called menu costs (Gans et al, 2005, p.654). Inflation increases the menu costs that firms must bear. In the current Australia economy, with its low inflation rate,......

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Title: Economics
Approximate Word Count: 1846
Approximate Pages: 8 (250 words per double-spaced page)

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