What is the cumulative real inflation tax paid

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Reference no: EM131530724

Question: Answer the following questions about the (real) inflation tax, assuming that the price level starts at 1.

a. Maria Moneybags keeps $1,000 in her sock drawer for a year. Over the year, the inflation rate is 10%. What is the real inflation tax paid by Maria for this year?

b. Maria continues to keep the $1,000 in her drawer for a second year. What is the real value of this $1,000 at the beginning of the second year? Over the year, the inflation rate is again 10%. What is the real inflation tax paid by Maria for the second year?

c. For a third year, Maria keeps the $1,000 in the drawer. What is the real value of this $1,000 at the beginning of the third year? Over the year, the inflation rate is again 10%. What is the real inflation tax paid by Maria for the third year?

d. After three years, what is the cumulative real inflation tax paid?

e. Redo parts a through d with an inflation rate of 25%. Why is hyperinflation such a problem?

Reference no: EM131530724

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