Which Statement Best Explains Why Governments May Prefer an Inflation

question 107

Multiple Choice

Which statement best explains why governments may prefer an inflation tax to some other kind of tax?

• A) The inflation tax is easier to impose.
• B) The inflation tax reduces inflation.
• C) The inflation tax falls mainly on high-income individuals.
• D) The inflation tax reduces the real cost of government expenditure.

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Definitions:

Pension Fund

A pool of assets forming an independent legal entity that is used to generate stable growth for future pension payments.

Legal Tender

The money that is officially recognized by a government as a valid form of payment that must be accepted for debts.

Commodity Money

Money that has intrinsic value, such as gold or silver, which can serve as a medium of exchange, a unit of account, and a store of value.

Fractional Reserve Banking

A financial system where just a small portion of the deposits at a bank is supported by real cash present and accessible for withdrawal.