Inflation confers no benefits on society, but it imposes several real costs. What among the following are costs of inflation ?
(A) Shoeleather costs associated with reduced money holdings
(B) Menu cost associated with more frequent adjustmental prices
(C) Increased variability of relative prices
(D) Unintended changes in tax liabilities due to nonindexations of the tax code
(E) Arbitrary redistribution of wealth associated with debts
Choose the correct answer from the options given below :

Correct option is D

Correct Answer: 4. (A), (B), (C), (D), (E)

Explanation: All the listed statements describe the real economic costs of inflation.

• (A) Shoeleather Costs: Inflation increases the opportunity cost of holding money (cash loses value). To avoid this, people visit banks more frequently to hold interest-bearing assets instead of cash. The "wear and tear" on shoes (and wasted time) represents a real resource cost.
  
• (B) Menu Costs: Firms must change their prices more often during high inflation. This involves physical costs like printing new menus, catalogs, and updating computer systems.
  
• (C) Relative Price Variability: Since firms change prices at different times (staggered price setting), relative prices become distorted. This misleads consumer decisions and causes allocative inefficiency.
  
• (D) Tax Distortions: Many tax codes are not indexed to inflation. For example, inflation exaggerates capital gains (nominal vs. real gain), leading to higher tax burdens than intended (bracket creep).
  
• (E) Arbitrary Redistribution: Unexpected inflation redistributes wealth from creditors (who receive money worth less) to debtors (who pay back with cheaper money). This is arbitrary and unrelated to merit or need.
  

Information Booster

• Expected vs. Unexpected: Costs like shoeleather and menu costs occur even if inflation is anticipated. Redistribution of wealth (E) primarily occurs when inflation is unanticipated.
  
• Confusion and Inconvenience: Inflation changes the "yardstick" of value, making it difficult for firms and investors to calculate profits and plan for the long term.
  
• Tobin Effect: A counter-argument suggesting that moderate inflation might encourage investment by causing a shift away from money balances toward physical capital.