Exam 17: Money Growth and Inflation: Part A

Your grandfather tells you that his annual income increased at an average rate of eight percent over his lifetime.He complains,however,that the average inflation rate of three percent reduced his ability to buy all the things he could have purchased if inflation had been zero.You respectfully tell your grandfather that he is committing the_________,because his annual income would have increased at an average rate of only five percent if inflation had been zero.

What is the inflation tax,and how might it explain the creation of inflation by a central bank?

You earn a nominal return of 6% on your savings and the tax rate is 20%.If the rate of inflation is 2%,what are the before-tax real interest rate and your after-tax rate of return?