Macroeconomics Q.?

Question

People can avoid the inflation tax by

a. reducing savings

b. not filing a tax return

c.reducing cash holdings

d. none of the above

Answer 1

c. reducing cash holdings

The only way to avoid the inflation tax is to hold as much of one's wealth in non-financial assets, but this may be easier said than done.

Answer 2

c.   People can put money into an interest bearing account.

Answer 3

c.  

The inflation "tax" is not really a tax.  It is the loss in purchasing power of a dollar due to inflation over time.  For example, say a banana was $.25 last year, but this year it's $0.35, the inflation "tax" for this year is $.10.  The way to avoid this "tax" is to have less cash on hand because if you had $100 last year and just held it, that $100 can't buy as much  today.  By placing money in an interest earning savings account, you can avoid the impact of an inflation tax as long as the savings account has an interest rate greater than or equal to the inflation rate.

Answer 4

c, by holding cash for a long time, you are not earning as much as you could, and it will decrease in value