f.If the nominal wage W is the same in both sectors,but the real wage in terms of farm goods is greater than the real wage in terms of haircuts,then the price of haircuts must have risen relative to the price of farm goods. g.Both groups benefit from technological progress in farming. 3.List all the costs of inflation you can think of,and rank them according to how important you think they are. 3.The costs of expected inflation include the following: a.Shoeleather costs.Higher inflation means higher nominal interest rates.which mean that peopl want to hold oweeal money balances.If peopl hol owe 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 inflatio causes greater variabilit yin relative prices.Si ce free-marke 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 ties, of in ways that a wmakers did not intend. e.The inconvenienee 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 f.Arbit redstnibutionsofwcalh.Uncxpectedinfationabitrarit changing.There is an additional cost to unexpected inflation: redistribute viduals.For example,if in on is higher than expected,debtors gain and creditors lose.Also,people with fixed pensions are hurt because their dollars buy fewer goods. balances depend on the nominal interest rate,then an increase in the rate of money growth affects consumption,investment,and the real interest rate.Does the nominal interest rate adjust more than one-for-one or less than one-for-one to cted inflation?This de iatio m the classical dichoto and the Fisher "Mu Tobin effect."How might you decide whether the Mundel-Tobin effect is important in practice? 4.An increase in the rate of money growth leads to an increase in the rate of inflation.Inflation,in turn,causes the nominal interest rate to rise,which meansf.If the nominal wage W is the same in both sectors,but the real wage in terms of farm goods is greater than the real wage in terms of haircuts,then the price of haircuts must have risen relative to the price of farm goods. g.Both groups benefit from technological progress in farming. 3.List all the costs of inflation you can think of, and rank them according to how important you think they are. 3.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. 4. Suppose that consumption depends on the level of real money balances (on the grounds that real money balances are part of wealth). Show that if real money balances depend on the nominal interest rate,then an increase in the rate of money growth affects consumption, investment, and the real interest rate. Does the nominal interest rate adjust more than one-for-one or less than one-for-one to expected inflation? This deviation from the classical dichotomy and the Fisher effect is called the“Mundell–Tobin effect.”How might you decide whether the Mundell–Tobin effect is important in practice? 4.An increase in the rate of money growth leads to an increase in the rate of inflation. Inflation,in turn,causes the nominal interest rate to rise,which means