The inflation tax is likely to be high when:
A) there is a budget surplus.
B) the government relies on seignorage to finance large portions of a budget deficit.
C) the Fed decreases the money supply.
D) corporate and personal income tax rates are increased.

Question

Quizplus · Accepted Answer

The inflation tax is essentially the loss of purchasing power that individuals experience when prices rise due to inflation. When the government relies on seignorage (i.e. the profits made from printing money) to finance a large portion of its budget deficit, it is essentially creating more money without increasing the output of goods and services in the economy. This results in an increase in the money supply, which can lead to inflation and ultimately result in an inflation tax on individuals.

The Inflation Tax Is Likely to Be High When