The Key Reason That Expected Inflation Can Distort Financial Decisions

question 92

Multiple Choice

The key reason that expected inflation can distort financial decisions is that

• A)lenders pay taxes on nominal rather than real returns.
• B)lenders have an easier time calculating expected inflation than do borrowers.
• C)expected inflation reduces the real value of the national debt.
• D)expected inflation results in substantial menu costs.

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Definitions:

Real Incomes

Refers to the income of individuals or nations after adjusting for inflation. It represents the purchasing power over goods and services.

Federal Tax Revenues

The income that the federal government receives from taxes, including income taxes, payroll taxes, and other taxation forms, used to fund public services and government operations.

Economy

The system of production, distribution, and consumption of goods and services within a specific geographic region.

Personal Income Tax

A tax levied on the income of individuals, with the rate usually increasing as income increases.