Question

"Inflation tax" means that: A) as the price level rises, taxpayers are pushed into higher tax brackets. B) as the price level rises, the real value of money held by the public decreases. C) as taxes increase, the rate of inflation also increases. D) in a hyperinflation, the chief source of tax revenue is often the printing of money.

Answer 1

The correct answer is: B

Step-by-step explanation:

Inflation tax is a penalty for holding cash at a time of high inflation. It is not an actual legal tax, it is the loss on the purchasing power of fixed-income due to the effects of inflation. It punishes people who hold assets in cash, which tend to be lower- and middle-class wage earners.

It is called a "tax" because the government benefits from using money now that will value less in the future. The government prints money to finance a project or finance itself, the total money supply in the market increases, generating an increase on inflation. So now, the value of the money you hold decreases, meaning, now you can buy fewer products with the same amount of money. Indirectly the government took money from money holders. You give away money purchase.