known as the fisher effect, inflation tax, classical dichotomy or velocity of mo

Question

known as the fisher effect, inflation tax, classical dichotomy or velocity of money

Consider Snackistan, a hypothetical country that produces only burritos. In 2011, a burrito is priced at S4.00. Complete the first row of the table with the quantity of burritos that can be bought with $900. Suppose the government of Snackistan cannot raise sufficient tax revenues to pay its debts. In order to meet its debt obligations, the government prints money. As a result, the money supply rises by 20% by 2012. Assuming money neutrality holds, complete the second row of the table with the new price of a burrito and the new quantity of burritosthat can be bought with $900 In 2012. The impact of the government's decision to raise revenue by printing money on the value money is known as the

Explanation / Answer

Ans (A) $900/4 = 225= Q

(B) The price also rises by 20%, new price = $4.8

New quantity = $900/$4.8 = 187.5

(C) Inflation tax : Due to printing of money, inflation rises and affects cosumer demand.

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