(solution) "During periods of inflation, people use real resources to reduce their holdings of fiat money….

(solution) "During periods of inflation, people use real resources to reduce their holdings of fiat money….

"During periods of inflation, people use real resources to reduce their holdings of fiat money. Such activities produce a private benefit with no corresponding social gain, which illustrates the social cost of inflation." Explain this quotation and give an example. 3. Unanticipated deflation also produces serious social costs. For each of the following, describe the deflation and analyze the associated costs: a. During the Great Depression, prices of major crops fell along with the prices of other commodities. What would happen to farmers who had large mortgages? b. Japan experienced a mild deflation in the 1990s. Assume that Japanese students each borrowed 2,000,000 yen (about $20,000) to pay for their education, hoping that inflation would allow them to pay off their loans in inflated yen. What would happen to these students if wages and prices began to fall at 5 percent per year?