Question

Intermediate Macroeconomics

HW 7

2. Why do we call the money creation policy an inflation tax? Who bears the burden of the tax?

3. Explain how an increase in the money growth rate can, for example, increase the equilibrium level of output.

Answer 1

2.Money creation policy is an inflation tax, as when money is created, it's supply increases in market as the interest rate lowers itself. Hence, the inflation increases but for those who were holding money with themselves bears the burden as the value of currency decreases with increase in inflation .This is known as inflation tax and the ones who tends to hold money with themselves, bears this burden.

3.increase in money growth rates creates the increase in equilibrium rate output as, when the supply of money increases, the general aggregate demand of people increases due to reduction in the rate of interest. This increment in ad facilitates the AS leading to increment in the level of output.