2 years, 1 month ago
Maria keeps 1,000 dollars for a year. overthe year, the inflation rate is 10 percent. what is the real inflation tax paid in a year?
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M$1 Answer
"Inflation Tax" isn't an actual tax written into law. It is the effect on the value of a currency as a result of the flow of currency into the economy or "inflation". Inflation tax is simply a tool used to measure the devaluation of currency relevant to inflation.
For example, if you have $10,000 and the annual inflation rate is 10%, your $10,000 is only worth $9,000 the following year.
If in 2009 a ton of rice cost $1,000, you could have bought 10 tons with your $10,000. But because of the 10% inflation throughout the year, in 2010 your $10,000 will buy you the same amount of rice $9,000 did in 2009, 9 tons. So, while you have $10,000 in your accout, it has lost value due to inflation or you could also say you were charged a 10% inflation tax.
The "real" interest rate is a function of the nominal interest earned and the rate of inflation. If you are earning 14% interest on your $10,000 and inflation is 10%, your "real" interest rate is approximately 4%.
For example, if you have $10,000 and the annual inflation rate is 10%, your $10,000 is only worth $9,000 the following year.
If in 2009 a ton of rice cost $1,000, you could have bought 10 tons with your $10,000. But because of the 10% inflation throughout the year, in 2010 your $10,000 will buy you the same amount of rice $9,000 did in 2009, 9 tons. So, while you have $10,000 in your accout, it has lost value due to inflation or you could also say you were charged a 10% inflation tax.
The "real" interest rate is a function of the nominal interest earned and the rate of inflation. If you are earning 14% interest on your $10,000 and inflation is 10%, your "real" interest rate is approximately 4%.
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