The more rapidly the government creates money to finance its budget deficits, the:
A)greater the inflation tax and the greater the reduction in the real value of any assets specified in nominal terms.
B)greater the inflation tax and the smaller the reduction in the real value of any assets specified in nominal terms.
C)smaller the inflation tax and the greater the reduction in the real value of any assets specified in nominal terms.
D)smaller the inflation tax and the smaller the reduction in the real value of any assets specified in nominal terms.

Question

Quizplus · Accepted Answer

When the government prints money rapidly to finance its deficits, it causes inflation to rise. This inflation acts as a tax on everyone who holds money because the value of their money decreases. Additionally, assets with values fixed in nominal terms (like cash or bonds with fixed interest rates) lose real value as the purchasing power of money falls.

The More Rapidly the Government Creates Money to Finance Its