Assume that Maria Moneybags keeps $1000 in cash in her sock drawer. Use this inf

Question

Assume that Maria Moneybags keeps $1000 in cash in her sock drawer. Use this information to answer questions 9 to 14.


9. Over the first year, the inflation rate is 10%. What is the real inflation tax paid by Maria for this year?


10. Maria keeps the cash in her sock drawer for another year and the inflation rate is 10% again during the second year. What is the real inflation tax paid by Maria for the second year?


11. Now assume that the inflation rate was 25% in the first year and 25% again in the second year. Recalculate your answer to question 9 using this higher inflation rate.


12. Recalculate your answer to question 10 assuming that the inflation rate was 25% in both the first year and the second year.


13. How much different is Maria’s total real inflation tax over the course of the two years when the inflation rate is 25% compared to when the inflation rate is 10%?


14. Use your answer to question 13 to explain why hyperinflation is such a problem.

Explanation / Answer

9. Over the first year, the inflation rate is 10%. What is the real inflation tax paid by Maria for this year? $1000*0.10 = $100 $100 is the real inflation tax. 10. Maria keeps the cash in her sock drawer for another year and the inflation rate is 10% again during the second year. What is the real inflation tax paid by Maria for the second year? 900*0.10 = $90 $90 is the real inflation tax. 11. Now assume that the inflation rate was 25% in the first year and 25% again in the second year. Recalculate your answer to question 9 using this higher inflation rate. 1000*0.25 = 250 $250 is the real inflation paid in the first period. 12. Recalculate your answer to question 10 assuming that the inflation rate was 25% in both the first year and the second year. 750*0.25 = 187.50 $187.5 is the real inflation paid in the second period. 13. How much different is Maria’s total real inflation tax over the course of the two years when the inflation rate is 25% compared to when the inflation rate is 10%? 250+187.5 = 437.50 100+90 = 190 14. Use your answer to question 13 to explain why hyperinflation is such a problem. Hyperinflation is a problem because high inflation means that just holding cash erodes savings quickly. So, people have no incentive to save and then end up poor helpless when they are old. Additionally, because the currency is worthless, international companies don't want to invest in your economy and countries don't want to loan to you or trade with you.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.