The rate of inflation increases. The government will benefit because:

Question

Quizplus · Accepted Answer

When the rate of inflation increases, the prices of goods and services increase, resulting in an increase in the tax base. This leads to an increase in the amount of tax revenues collected by the government. This is the reason why the government benefits from inflation as it can use the additional revenue collected to finance its expenses without increasing taxes. Therefore, option B is the best choice. Option A is not correct as inflation reduces the value of money, which makes it difficult for the government to repay its debt, and therefore, it is not beneficial for the government to be a creditor in an inflationary environment. Option C is also incorrect as the interest that the government pays on its bonds is fixed, and an increase in inflation will not reduce it. Option D is also incorrect as productivity increases usually reduce the cost of goods and services, and therefore, cause deflation rather than inflation.

The Rate of Inflation Increases