Lnc14 - Lecture Notes Companion 14Inflation the cruelest tax Study question"Inflation is the cruelest tax Explain For full credit you must

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Lecture Notes Companion 14—Inflation, the cruelest tax Study question: "Inflation is the cruelest tax." Explain. For full credit you must explain (A) how inflation is a tax, and (B) why it is the cruelest tax. Explanation: A) How is inflation a tax? Inflation is a tax on holding money. (Don’t stop there, or you’ll lose points.) Let me explain. First, let’s define a tax. At a minimum, a tax is an involuntary transfer of purchasing power from an individual to the state. Remember that money is just a record of purchasing power. A sales tax is a tax because you are required to give the state some of your money—and hence purchasing power—whether you like it or not. Now, an example. Say that, in 2006, the money supply of the Kingdom of Papyrus was equal to $1 million. If the velocity of money (the number of times a dollar is spent in a year to buy new final goods) equals 1, then nominal GDP for the year is $1 million. (We’ll look at this more closely later.) That is, with the $1 million they have, the citizens of Papyrus can buy
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This note was uploaded on 11/23/2011 for the course ECON 231 taught by Professor Staff during the Fall '09 term at Calhoun Community College.

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