Consider Tralfamadore, a hypothetical country that produces only veggie burgers.

Question

Consider Tralfamadore, a hypothetical country that produces only veggie burgers. Initially, a veggie burger is priced at $2.00. Winona has $100 in her wallet, and, with this, she can purchase veggie burgers. Suppose the government of Tralfamadore cannot raise sufficient tax revenues to pay its debts. In order to meet its debt obligations, the government prints money. As a result, the money supply rises by 40%. If monetary neutrality holds, the 40% increase in the money supply will cause the price of a veggie burger to to. After the government prints money to pay its debts, the $100 in Winona's wallet will purchase veggie burgers (round down to the nearest whole veggie burger). The impact that the government's decision to raise revenue by printing money has on the value of the money in Winona's wallet is known as the

Explanation / Answer

100/2=50
increase to 2+(0.4*2)=2.08
100/2.08=48.07 ~ 48
Inflation tax
Inflation tax is a term which refers to the financial loss of value suffered by holders of cash and (if inflation is unexpected) fixed-rate bonds, as well those on fixed income (not indexed to inflation), due to the effects of inflation; or capital gains tax resulting from inflation.

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