Inflation decreases the growth of capital because i. when the after-tax real interest rate falls, savings decreases.
Ii) velocity increases when inflation increases.
Iii) the higher the inflation rate, the higher is the true income tax rate on income from capital.
A) i only
B) ii only
C) iii only
D) i and iii
E) i, ii, and iii

Question

Quizplus · Accepted Answer

Option i is correct because when real interest rates fall due to inflation, individuals tend to save less which decreases the growth of capital. Option iii is also correct because when inflation increases, the nominal interest rates also increase but the after-tax real interest rate falls which leads to a higher true income tax rate on income from capital. Option ii is not directly related to the growth of capital, although it can influence inflation rates indirectly.

Inflation Decreases the Growth of Capital Because I