Question

answer the following questions about the (real) inflation tax, assuming that the price level starts at 1. round answers to two places after the decimal point when necessary. do not round intermediate calculations of the price level. a. maria moneybags keeps $1,000 in her sock drawer for a year. over the year, the inflation rate is 10%. what is the real inflation tax paid by maria for this year?

Answer 1

The real inflation tax paid is $1,000 × 0.25 = $250.

The price level at the end of the first year will be 1.25 and at the begin.

Inflation

Inflation occurs when the average cost of goods and services rises throughout the economy, depreciating a currency's purchasing power and lowering the value of some assets. Less goods, services, and expenses are covered by the same paycheck. Because it makes taxpayers less wealthy due to rising prices and "bracket creep" while boosting the government's spending capacity, it is frequently referred to as a "hidden tax."

The simplest explanation is that it happens when there is the same number of real products and services available for a certain amount of money, which necessitates an increase in pricing.

The easiest way for this to happen is when decision-makers inject additional money into the economy, either through Federal Reserve actions or deficit-financed government spending.

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