In the early 2000s in Ecuador, the central bank financed the government deficit and created high inflation. The high level of inflation and its relationship to the government deficit are an example of:
A)an inflation tax.
B)the underground economy.
C)disinflation.
D)the central bank dependency.

Question

Quizplus · Accepted Answer

An inflation tax occurs when a government finances its deficit by printing more money, leading to inflation. This reduces the value of money held by the public, effectively acting as a tax on holders of the currency. In the case of Ecuador in the early 2000s, financing the government deficit by the central bank led to high inflation, which is a classic example of an inflation tax.

In the Early 2000s in Ecuador, the Central Bank Financed