The Costs of Inflation

This chapter discusses the cost of inflation, through both expected and unexpected inflation. Inflation is a tax over the money balance that agents hold. Professor Larraín touches upon terms such as efficiency loss, menu costs, Bracket Creep Effect, and regressive tax. He also provides examples of costs of unexpected inflation, such as wealth redistribution between creditors and debtors, and income redistribution, when real wages are reduced within a contract. Real world examples are given of unexpected inflation. The final effect of unexpected inflation is that the wrong production decisions are made.

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