If People Always Perfectly Anticipated and Adjusted to the Inflation

question 21

Multiple Choice

If people always perfectly anticipated and adjusted to the inflation rate, then

• A)real interest rates would be zero
• B)there would be no menu costs
• C)they would still have to worry about shoe-leather costs
• D)the costs of inflation to society would be zero
• E)none of the above

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Definitions:

Relative Opportunity Costs

The loss of potential gain from other alternatives when one alternative is chosen, expressed in terms of the ratio between the cost of the chosen alternative and the cost of the next best alternative.

Opportunity Cost

The cost of forfeiting the next best alternative when one option is chosen over another.

Comparative Advantage

The capability of a company, individual, or country to manufacture a product or offer a service with a reduced opportunity cost than competing entities.

Specialization

The process of focusing efforts and resources on a limited range of activities, goods, or services to gain efficiency or expertise.