Answer:

With the deduction of Tax, we lose money along with the purchasing power. In the same way with inflation, the purchasing power of money decreases. In this sense, the inflation is like a tax.

With the government increasing the money supply in the economy increases rapidly effecting in the more loss of purchasing power resulting in hyperinflation. In these circumstances, the government, for its financial funding, uses the inflation tax instead of tax.

Answer:

Effect of money growth:

According to the quantity theory of money and the Fisher effect, increase in rate of money growth causes the rate of inflation and nominal variables to increase, but the real variables remain constant.

Thus, the option 'a' is correct.

Answer:

Real interest rate:

Nominal interest indicates how fast the deposited amount in the saving account will increase.

Real interest rate indicates how fast the purchasing power of the saving account will increase over time. Increase in rate of inflation causes the purchasing power to fall; hence, the real interest rate can be obtained by using the following formula:

…… (1)

The nominal interest rate, after tax is levied, can be calculated as follows:

…… (2)

a.

Nominal rate of interest is 10 percent and rate of inflation is 5 percent. Substitute the respective values in Equation (1) to obtain the real interest rate.

Real interest rate before tax:

Real interest rate after tax:

b.

Nominal rate of interest is 6 percent and rate of inflation is 2 percent. If the tax rate is 40 percent, then the real rate of interest before tax can be obtained by using the Equation (1) and after tax can be obtained by using the Equation (1) and (2).

Real interest rate before tax:

Real interest rate after tax:

c.

Nominal rate of interest is 4 percent and rate of inflation is 1 percent. If the tax rate is 40 percent, then the real rate of interest before tax and after tax can be obtained by using the Equation (1).

Real interest rate before tax:

Real interest rate after tax: