Which statement about the inflation tax is accurate?

• A. It increases government revenue
• B. It reduces the value of money held by the public
• C. It lowers the prices level
• D. It increases unemployment

Answer: (B)

Inflation tax comes from the fact that inflation erodes the purchasing power of money held by people. When prices rise, the same nominal amount of cash buys fewer goods, so the real value of cash balances falls. That loss in real value acts like a tax on money holdings, which is why the accurate statement is that inflation reduces the value of money held by the public. It does not lower the price level (inflation raises prices), and it’s not a straightforward source of government revenue in the usual sense, nor does it automatically imply higher unemployment.