Why Does Inflation Increase Your Tax Burden, at Least in the Short

question 129

Multiple Choice

Why does inflation increase your tax burden, at least in the short run? I. Inflation bloats stock prices, which leads to a capital gains tax burden. II. The market value of financial assets rises with inflation and the U.S. tax system assesses taxes on such gains, even if the "real" value of such assets remains the same. III. Consumers pay higher sales taxes when the prices of goods and services increase due to inflation.

• A) I and II only
• B) II and III only
• C) I and III only
• D) I, II, and III

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Definitions:

Price Elasticity Of Demand

Percentage change in quantity demanded of a good resulting from a 1-percent increase in its price.

Marginal Revenue

The extra revenue received from the sale of an additional unit of a product or service.

Elasticity Of Demand

A metric reflecting how demand for a commodity reacts to price adjustments.

Profit-Maximizing Price

The price level at which a company can sell its product to maximize its profit, calculated by understanding demand and cost structures.