Principles of Economics- Mankiw (5th) 622

Principles of Economics- Mankiw (5th) 622 - 642 PA R T T E...

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642 PART TEN MONEY AND PRICES IN THE LONG RUN SHOELEATHER COSTS As we have discussed, inflation is like a tax on the holders of money. The tax itself is not a cost to society: It is only a transfer of resources from households to the gov- ernment. Yet, as we first saw in Chapter 8, most taxes give people an incentive to alter their behavior to avoid paying the tax, and this distortion of incentives causes deadweight losses for society as a whole. Like other taxes, the inflation tax also causes deadweight losses because people waste scarce resources trying to avoid it. How can a person avoid paying the inflation tax? Because inflation erodes the real value of the money in your wallet, you can avoid the inflation tax by holding less money. One way to do this is to go to the bank more often. For example, rather than withdrawing $200 every four weeks, you might withdraw $50 once a week. By making more frequent trips to the bank, you can keep more of your wealth in your interest-bearing savings account and less in your wallet, where inflation
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