States,the central bank is the Federal Reserv -often called the fed The control of the money supply is called monetary policy.The prin ary way that the Fed controls the money supply is through open-market operations,which involve the purchase or sale of government bonds.To increase the money supply,the Fed uses dollars to buy government bonds from the public,putting more dollars into the hands of the public.To decrease the money supply,the Fed sells some of its government bonds,taking dollars out of the hands of the public 5.List all the costs of inflation you can think of,and rank them according to how important you think they are. 5.Th ected inflation include the following a.Shoe eather costs.Higher in lation means high I interest rate s,which mean that people want to hold lower real money balances.If people hold lower money balances,they must make more frequent trips to the bank to withdraw money.This is inconvenient(and it causes shoes to wear out more quickly). b.Menu costs.Higher inflation induces firms to change their posted pric s more often.This may ostly if they must repri their f menus s and catalogs c.Greater variability in relative prices.If firms change their prices infrequently, then inflation causes greater variability in relative prices.Since free-market economies rely on relative prices to allocate resources efficiently,inflation leads to microeconomic inefficiencies. ed tax liabilities.Ma the effect of inflation.Hence,inflation can alter firms'tax liabilities,often in ways that lawmakers did not intend. e.The inconvenience of a changing price level.It is inconvenient to live in a world with a changing price leveL Money is the vardstick with which we measure eco- omic t ran s.Money is a les useful sure when its value is always cha nging.There n additional co o unexpecte d i nflation f.Arbitrary redistributions of wealth.Unexpected inflation arbitrarily redistributes wealth among individuals.For example,if inflation is higher than expected,debtors gain and creditors lose.Also,people with fixed pensions are hurt because their dollars buy fewergoods. 6Explain different between portfolio and transctions theories of money demand. 6.Portfolio theories of money demand emphasize the role of money as a store of value These theories stress that people hold money in their portfolio because it offers a safe nominal retum.Therefore,portfolio theories suggest that the demand for money depends on the risk and return of money as well as all the other assets that people holdStates, the central bank is the Federal Reserve—often called the Fed.The control of the money supply is called monetary policy. The primary way that the Fed controls the money supply is through open-market operations,which involve the purchase or sale of government bonds. To increase the money supply,the Fed uses dollars to buy government bonds from the public,putting more dollars into the hands of the public.To decrease the money supply,the Fed sells some of its government bonds,taking dollars out of the hands of the public. 5.List all the costs of inflation you can think of, and rank them according to how important you think they are. 5.The costs of expected inflation include the following: a. Shoeleather costs.Higher inflation means higher nominal interest rates,which mean that people want to hold lower real money balances.If people hold lower money balances,they must make more frequent trips to the bank to withdraw money.This is inconvenient(and it causes shoes to wear out more quickly). b. Menu costs.Higher inflation induces firms to change their posted prices more often.This may be costly if they must reprint their menus and catalogs. c. Greater variability in relative prices. If firms change their prices infrequently, then inflation causes greater variability in relative prices.Since free-market economies rely on relative prices to allocate resources efficiently, inflation leads to microeconomic inefficiencies. d. Altered tax liabilities.Many provisions of the tax code do not take into account the effect of inflation.Hence,inflation can alter individuals’and firms’tax liabilities, often in ways that lawmakers did not intend. e.The inconvenience of a changing price level. It is inconvenient to live in a world with a changing price level. Money is the yardstick with which we measure eco￾nomic transactions. Money is a less useful measure when its value is always changing. There is an additional cost to unexpected inflation: f.Arbitrary redistributions of wealth.Unexpected inflation arbitrarily redistributes wealth among individuals.For example,if inflation is higher than expected, debtors gain and creditors lose.Also,people with fixed pensions are hurt because their dollars buy fewer goods. 6 Explain different between portfolio and transctions theories of money demand. 6.Portfolio theories of money demand emphasize the role of money as a store of value. These theories stress that people hold money in their portfolio because it offers a safe nominal return.Therefore,portfolio theories suggest that the demand for money depends on the risk and return of money as well as all the other assets that people hold