Inflation distorts savings when the nominal rather than the real interest rate is taxed.

Question

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When inflation distorts savings, it affects the real value of money saved. If the nominal interest rate is taxed, the investor's taxes will be based on the nominal value of their savings, not the real value. As a result, inflation will reduce the real value of the investor's savings, but they will still have to pay taxes based on the higher nominal value. This distorts the value of savings and can discourage individuals from saving, leading to lower investment and economic growth.

Inflation Distorts Savings When the Nominal Rather Than the Real