If the government of a developing country reduces its budget deficit, then the inflation tax:
A)should increase.
B)should decrease.
C)should not change.
D)may increase, decrease, or not change depending on whether the government cuts taxes or raises government expenditures.

Question

Quizplus · Accepted Answer

Reducing the budget deficit typically involves either decreasing government spending or increasing taxes, both of which can lead to a decrease in the inflation rate. This is because both measures can reduce the amount of money circulating in the economy, thereby reducing the pressure on prices to rise. The inflation tax, which refers to the erosion of purchasing power due to inflation, would therefore decrease as well.

If the Government of a Developing Country Reduces Its Budget