Question

How would a permanent reduction in inflation impact menu costs and unemployment? a. It would permanently reduce menu costs and permanently lower unemployment. b. It would permanently reduce menu costs and temporarily raise unemployment. c. It would temporarily reduce menu costs and temporarily lower unemployment. d. It would temporarily reduce menu costs and temporarily raise unemployment.

Answer 1

Option D

• We know that menu costs refers to the costs incurred by firms when they change the prices of certain goods and services.
• When the inflation decreases, the aggregate demand in the Economy decreases and the demand for labour decreases which raises unemployment and the firms do not change their prices much due to which the menu costs also fall.
• When the inflation reduces permanently, there is only temporary reduction in the menu costs and the temporary raise in unemployment due to the various fiscal and monetary policies used.
• The use of various Economic policies has made it easier for firms to have only a temporary unemployment effects even when the inflation is reduced permanently.