Speaker 2
But we can still think about inflation as undermining the three values of money, it's just less extreme. For example, money is still a pretty good unit of account when inflation's only running two % a year. But sellers do have to keep up with inflation and change their prices. Economists refer to the costs associated with changing all those prices as menu costs, as it's a bit like changing all the prices on a menu. This takes time and energy from them being able to actually produce things. Instead, you or your staff are spending our time and resources reprinting price tugs. An inflationis
Speaker 1
not just a hassel for sellers. It's a real hassel for buyers too. Because when money's losing its value, you end up spending your time and energy trying to withdraw your money and either spending it or putting it into something else that will keep its value. We call these shoe leather costs, because running around to spend your money before it loses value causes you to wear out the leather on your shoes. It's a metaphor, of course, ut it stands in for all this hassle. Yes?
Speaker 3
And also, i'm wondering, say the price of something goes up, how can you tell if this price has gone up due to people demanding more of it, or if it's due to inflation rate?
Speaker 2
That's another problem with inflation, and it makes it confusing for sellers to know if they should be making more to meet and increase in demand, or if the price rises just due to inflation.
Speaker 1
Eve lower levels of inflation can also make money a less good store of value. That can have the practical consequence of redistributing from savers and lenders to borrowers. Nows, let's say you're paying back money on a loan you took out, and you repay 200 bucks a month to the lender. Well, due to inflation, you'r 200 bucks is worth less each month, but you're still paying the same amount of currency back as a borrower. You win. But the person who lent you the money, and who is getting your less valuable 200 bucks a month is now able to buy less with what you're repaying them.
