Inflation distorts savings because people pay taxes on their nominal rather than their real interest income.

Question

Quizplus · Accepted Answer

Inflation reduces the purchasing power of money, thus eroding the real value of savings. When people earn interest income on their savings, they are taxed on the nominal interest income rather than the real interest income. As a result, inflation distorts savings and reduces the after-tax return on investment.

Inflation Distorts Savings Because People Pay Taxes on Their Nominal