A formula for the inflation tax: The amount of money the government raises from

Question

A formula for the inflation tax: The amount of money the government raises from the inflation tax is M.

a. Write this amount as a ratio to nominal GDP. Multiply and divide by M to get an expression for the ratio of revenue from the inflation tax to real GDP. Your answer should take the form of the product of a growth rate and a different ratio. Interpret the equation.

b. Use the quantity theory to replace the growth rate of money in this product with a term that involves the inflation rate.

Please refer to St. Louis Fed (FRED) database to answer the following question:

c. How much revenue, as share of GDP, would the inflation tax raise in the following scenario? Assume the growth rate of real GDP is 2% in these calculations: (use Real GDP, CPI all items-all urban consumers, and assume that the velocity is constant at

i) The United States in 1981.

ii) The United States in 2005.

d. Suppose there is a hyperinflation where the inflation rate rises to 2000%. For a given value of M/Y, the formula you derived in b) suggests that the inflation tax could raise more than 100% of GDP in revenue. Clearly, this could not ever happen. Why not?

Explanation / Answer

n

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.