If the public holds $300 billion in monetary purchasing power and the inflation rate is 5%, then the inflation tax that year is:
A) $5 billion.
B) $15 billion.
C) $60 billion.
D) $1,500 billion.

Question

Quizplus · Accepted Answer

Inflation tax is the reduction in purchasing power due to inflation. In this case, a 5% inflation rate means that prices have increased by 5%. Therefore, the public's purchasing power has decreased by 5% of $300 billion, which is $15 billion.

If the Public Holds $300 Billion in Monetary Purchasing Power