Q. Consider the following statements regarding the term ‘Inflation Tax’:
1.It describes the loss of purchasing power experienced by people who hold currency due to inflation.
2.It is also known as seignorage, which is an income for the government due to its authority to print and circulate currency.
3.Governments can use it as a policy tool by taxing companies that give salary increases above a set level.
Which of the statements given above is/are correct?
Answer: D
Notes:
Explanation:
It’s a situation where inflation erodes the value of money for those holding currency, acting like a tax on their income. This is also known as seignorage, as the act of printing and circulating currency to sustain government expenditure at the cost of people’s income functions as an income to the government. Additionally, the term can be used in a prices and incomes policy where companies are taxed on salary increases that exceed a set level3.
