ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When the government issues more money to finance its budget deficit, to repay its past debt and to meet its rising demand for goods and services during inflation, it acts as a tax on the people and it transfers purchasing power to the government.

Detailed explanation-2: -Answer: The term “inflation tax” refers to the penalty for retaining currency during a period of high inflation. It is a form of taxation in which the government alters the money supply. When the supply of money expands, the value of existing money decreases, resulting in a form of tax on existing money holders.

Detailed explanation-3: -An inflation tax is the economic disadvantage suffered by holders of cash and cash equivalents in one denomination of currency due to the effects of inflation, which acts as a hidden tax that subtracts value from currency.

Detailed explanation-4: -The opportunity cost of holding money is the interest forgone on an alternative asset. The opportunity cost of holding money is the nominal interest because it is the sum of the real interest rate on an alternative asset plus the expected inflation rate, which is the rate at which money loses buying power.

Detailed explanation-5: -Because profits and wages are received at the end of the period, inflation imposes a tax on both. The inflation tax and the income tax therefore have the same tax base. Relying on the inflation tax, however, would also distort the margin between cash and credit goods.