sara has 200 in currecy and 2000 in a bank account on which

sara has $200 in currecy and $2,000 in a bank account on which the bank pays no interest. the inflation rate is 2 percent a year. calculate the amount of inflation tax that sara pays in a year

Solution

Inflation tax is the monetary loss in value from currency and financial assets caused by inflation.

Value of Sara\'s assets = Currency + Bank Savings = $(200 + 2,000) = $2,200

A 2% inflation will lower her purchasing power by 2%, so

Inflation tax = $2,200 x 2% = $44