The inflation tax is likely to be high when:

Question

Quizplus · Accepted Answer

The inflation tax is the loss of purchasing power resulting from an increase in the general price level caused by an increase in the money supply. When the government relies on seigniorage (the profits made from printing money) to finance a large portion of a budget deficit, it is effectively increasing the money supply, which can cause inflation and therefore, a high inflation tax. A budget surplus (choice A) would not necessarily lead to a high inflation tax, and decreasing the money supply (choice C) would actually reduce the inflation tax. Increasing the corporate and personal income tax rates (choice D) would also not necessarily lead to a high inflation tax, although it may have other economic effects.

The Inflation Tax Is Likely to Be High When