10 Questions
The price equation for Sector 1 is P1 = w + μ1 + θ1.
False
The mark-up differential has a negative impact on the price differential between the two sectors.
False
The price equations for each sector are derived from equation (8.10).
False
A higher productivity in a sector leads to a higher price.
False
The price equation for Sector 2 is P2 = w - μ2 - θ2.
False
The price differential between the two sectors depends negatively on the mark-up differential.
False
If the mark-up is higher in Sector 1, the price in Sector 1 will be lower.
False
The productivity differential has a positive impact on the price differential between the two sectors.
False
The price equations for the two sectors are identical.
False
The price differential between the two sectors is independent of the productivity differential.
False
Study Notes
Inflation Tax
- The revenue from inflation tax is very low compared to changes in ordinary tax levy, with a rate of 0.3%
- Formula: Tπ = π × 0.03 × 0.10 = 0.003
- With 30% inflation, the revenue would be 3% of GDP, making it a non-negligible share
Supply and Demand for Inflation
- Inflation is a matter of supply and demand
- Demand for inflation comes from the government, benefiting from fiscal drag and lower real value of government debt
- Supply of inflation is influenced by lack of central bank independence
- Winners with inflation: debtors/borrowers (such as government), losers: creditors
Public Deficit and Demand for Inflation
- Central banks and governments may create excess money, leading to inflation, due to demands from the private and public sectors
- Independent central banks committed to contrasting inflation do not supply the demanded inflation
Fiscal Drag and Seigniorage
- Fiscal drag: taxation on nominal income increases due to inflation, even if real income remains unchanged
- Result: lower real disposable income
- Remedy: indexation of tax brackets to restore neutrality
- Seigniorage: revenue gained by government due to inflation, benefiting debtors
Multisectoral Economy
- Average inflation rate is the weighted average of sectoral inflation rates
- Inflation is higher in sectors with slow productivity growth
Inflation and Productivity
- Inflation is higher in sectors with slow productivity growth
- Real wage can be maintained with indexation of wages and tax brackets
Calculate the revenue from inflation rates using a mathematical formula. This quiz is based on an economics concept and involves mathematical calculations.
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