From 1983-88, Peru had an annual inflation rate of 1,797%.What percentage of GDP did the Peruvian government raise in revenue through the so-called "inflation tax"?

Question

Quizplus · Accepted Answer

The "inflation tax" refers to the revenue raised by the government through the increase in prices due to inflation. In other words, as prices rise, the government collects more revenue from the taxes that are levied on those prices.

To calculate the percentage of GDP raised through the inflation tax, we need to know the inflation rate as well as the level of taxes as a percentage of GDP. We already know the inflation rate (1,797%), but we do not have information on the level of taxes as a percentage of GDP.

However, we can eliminate answer choices A) 1)9%, B) 3)5%, and E) 9)8% because these percentages are too low to account for the significant inflation rate.

Answer choice D) 7)2% is a possibility, but it may still be too low considering the severity of the inflation rate.

Therefore, the best answer choice is C) 4)7%, as this percentage is high enough to account for the inflation tax while still being plausible.

From 1983-88, Peru Had an Annual Inflation Rate of 1,797