 the problem of inflation. The students, we discussed unemployment in the last module. Today, we will talk about inflation. First of all, we will see what the cost of inflation will be. Two types. First, we will talk about the cost of anticipated inflation and then about unanticipated inflation. So, if inflation is perfectly anticipated, it will not affect any prices and wages because prices and wages will be adjusted according to the anticipated inflation and wages will be adjusted according to that. So, it will not affect. Even returns on assets may rise exactly with inflation. The returns on assets, you know that the nominal interest rate will be adjusted according to the expected inflation. Because it is expected, we are saying that if it is anticipated inflation, then the nominal inflation will also be adjusted accordingly. But, what is its cost? I mean, is it not because the prices are increasing and it is anticipated and we are assuming that all the prices are increasing. I mean, the general price level is increasing and there are no changes in the relative prices that it is not that one is increasing and the other is increasing. We are assuming the sake of simplicity that all the prices are increasing, one is increasing. So, prices will also be increasing and wages will also be increasing. If we want to spend more, then our interest rate is also increasing accordingly. So, it means that there will be no real effect in that context. But, what can be the impact of this cost? We use the shool-eather cost. This means that people spend resources to economize on currency holding. Shool-eather cost means that since inflation is happening and the purchasing power is decreasing, people will like to hold less money with themselves. They will want to keep less money because their value is decreasing. They will want to invest somewhere. So, it is obvious that when they will need to pay for their transactions, then they will have to take money from the bank again and again. So, we say that this is shool-eather cost. So, this is an ordinary matter but the impact of this is that it is estimated that if 10% inflation is in the economy, then the shool-eather cost is about 0.3% of GDP. So, obviously 0.3% of GDP is not insignificant. This is important. So, apart from this, we have talked about the menu cost in the Indian model. The cost of changing prices. The menu cost means that when the prices of restaurants are changed, then they have to reprint their menu. So, we call it the menu cost. The cost of changing prices but technology may mitigate this somewhat. So, it is obvious that printing is not such a thing. It is technological, it is online. All the prices are there. After changing, the cost will be less. Okay. But important is that if inflation is unanticipated inflation, then what is the cost of that? This is the actual, by actual inflation and expected inflation. We call the difference of these two. Unanticipated inflation. What will happen in this? Realized real returns differ from expected real returns. Since expected or actual inflation is different, in this regard, the returns on your assets that you were expecting will differ from that. Expected real return. This is really a symbol. We use it for real interest rate. We use it for nominal interest. We use it for expected inflation. So, what is expected real interest? Nominal interest minus expected inflation. What will happen in real return? When we do actual inflation minus, then it will be different. Expected real return. Expected real return is when we do actual inflation minus, then it will be real return and when we do expected minus, then it will be expected real return. So, actual real return differs from the expected by the same amount as the expected inflation differs from the actual inflation. That means, the difference between the expected and the actual returns will determine that difference. Numerical examples. We understand this. For example, nominal interest rate is 6%. Expected inflation is 4%. So, expected real will be 6 minus 4%. 2% will be the expected real return. But, if actual inflation is 6%, then nominal 6% nominal interest rate is 6%. If actual inflation is 6%, then real interest rate will be 0. Right? How did you calculate? Nominal interest rate minus actual inflation rate. So, 6 minus 6 is 0. And if expected actual inflation rate becomes 2%, then from 6 to 2 minus, then actual real interest rate will be 4%. So, this is the purpose of telling that when you were expecting something and it is different from the actual returns, then your nominal returns will be less. And if actual returns are less, then your real returns will be more. So, unanticipated inflation, similar effect on wages and sales. And the way it affects returns, similarly, wages and salaries will be affected in the same way. People expected 10% inflation. According to that, they had made the contract of their wages. Now, if inflation is more than that, then the salient class will remain in losses. And if it is less, expected inflation will be less, then it will benefit them. So, the benefit of all this is that unanticipated inflation is actually transfer of wealth. How? For example, if actual inflation is more than expected, expect people to do 4%, actual 6%, then what will be the benefit of this? What will be the benefit of this and what will be the loss of this? The benefit of this will be those who are taking the actual, expected inflation, those who took the first cuts, will be paid for the unanticipated inflation. This means that wealth will be transferred from lander to borrower. And if people take the unanticipated inflation, then the unanticipated inflation will be paid. So, people want to avoid risk of unanticipated inflation. So, unanticipated inflation will involve risk in everything. Any agreement, any contact, expected inflation will involve risk. So, people obviously risk averse, to avoid risk. For example, they want to avoid inflation by forecasting time, energy and resources. So, this will be the cost of inflation. So, loss of value is one more important thing, loss of value is provided by the prices. Prices are basically in the course of basic economics where they do the work of signals. For allocation of resources there is an indicator that the price of the item means that the demand of the item is higher, the resources will be shifted and the price of the item will be reduced. But if the prices of inflation are very high and the prices are changing rapidly, like traffic lights, if they are changing very rapidly, then obviously the purpose of the item cannot be served. Similarly, when prices are changing very rapidly, then in the economy allocation of resources and the signals of the item will be greatly affected. So, this will create a confusion about changes in the aggregate prices versus changes in the relative prices. Okay? So, the changes in the aggregate prices then the overall price level is changing or the relative price is changing. This means that the price of the item is increasing more and the relative price will be changing. And if both the items are increasing then the impact will be different. So, people expand resources to extract the correct signals from prices. Obviously, to understand this we will spend the energy resources. One solution of this is that people could use indexed contacts to avoid the risk of transferring wealth because of unanticipated inflation. Indexed contacts means the government or the US labor contacts are indexed by COL. COLA stands for cost of living adjustment. It is mentioned in the adjustment that the inflation rate will change according to the rate of inflation. Indexed contacts are more prevalent in countries with high inflation. Especially in countries where inflation is high then the context is linked with inflation. In other words, the inflation rate increases or decreases. Thank you very much.