The widespread use of technology has revolutionized the banking industry, making it much easier for customers to access and manage their money. Does this mean that the shoe-leather costs of inflation are higher or lower than they used to be? Explain.
Shoe-leather costs as a result of inflation will be lower because it is now less costly for individuals to manage their assets in order to economize on their money holdings. ATM machines, for example, give customers 24-hour access to cash in thousands of locations. This reduction in the cost of obtaining money translates into lower shoe-leather costs.
Question
Most people in the United States have grown accustomed to a modest inflation rate of around 2–3%. Who would gain and who would lose if inflation came to a complete stop for several years? Explain.
If inflation came to a complete stop for several years, the inflation rate of zero would be less than the expected inflation rate of 2–3%. Because the real interest rate is the nominal interest rate minus the inflation rate, the real interest rates on loans would be higher than expected, and lenders would gain at the expense of borrowers. Borrowers would have to repay their loans with funds that had a higher real value than was expected.