Chapter 33, Problem 4MCQ

To determine

The correct option for inflation tax.

Answer to Problem 4MCQ

From the available options, the correct option is the result of a decrease in the value of money held by the public.

Explanation of Solution

An inflation tax does not impose by the government to control prices in the economy but the government charges this tax to control the supply of money. It means this tax amount would not be paid directly in proportion to the sale price while people purchase because it is the amount that is charged when people retain money rather than spending or investing. This tax is charged by the federal government in the country as it is not controlled by the state government.

Moreover, this tax would be higher when there is high inflation in the economy. And, when the government charges this tax on people who retains money then it would result in a decrease in the value of money that they held.

Therefore, the correct option is c (the result of a decrease in the value of money held by the public.) and all other options are incorrect.

Economics Concept Introduction

Introduction: The inflation tax refers to the tax which is charged by the government as a penalty when someone retains currency in a time period of high inflation. This tax helps to control the supply of money in the economy.