David Anderson and Margaret Ray define an "inflation tax" as the reduction in the value of money held by the public caused by inflation.
This is how the inflation tax works. The government runs a deficit and pays for the deficit by having the treasury print bonds and the central bank purchase the bonds using open market operations.
If inflation erodes the value of a dollar, then the "inflation tax" is the value of the dollar less inflation.
Wikipdedia has a slightly different definition.
Since 2008 the United States has seen an explosion in money growth. Where is the inflation?
I am now convinced that the best book for AP Economics test preparation is the book written by David Anderson and Margaret Ray. The Amazon link is below.
The banks are holding around $1.6 trillion with the Federal Reserve, and that doesn't even include the money they are required to hold there. The TARP bill included a provision giving the power to the Federal Reserve to pay the banks interest to hold their reserves at the Fed.
ReplyDeleteThe money hasn't completely hit the economy yet, but it is coming.