In macroeconomics, the "inflation tax" refers to the loss in purchasing power from holding money when the price level rises. It falls most heavily on those who hold which type of asset?

• A. Long-term fixed-rate debt as a borrower
• B. Inflation-indexed government bonds (e.g., TIPS)
• C. Common stocks whose nominal dividends rise one-for-one with inflation
• D. Large balances of currency and non-interest-bearing checkable deposits

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of the inflation tax. Inflation tax refers to the reduction in the real value or purchasing power of money holdings due to an increase in the overall price level.
2. Step 2: Identify which assets lose value when inflation rises. Assets that are nominal and fixed in value, such as cash or non-interest-bearing deposits, lose purchasing power because their nominal amount does not adjust with inflation.
3. Step 3: Analyze the options given: Long-term fixed-rate debt as a borrower benefits from inflation because the real value of the debt decreases; inflation-indexed bonds adjust payments with inflation, protecting holders; common stocks with dividends rising one-for-one with inflation maintain real value.
4. Step 4: Recognize that large balances of currency and non-interest-bearing checkable deposits are held in nominal terms and do not earn interest, so their real value erodes directly with inflation, making holders bear the inflation tax most heavily.
5. Step 5: Conclude that the inflation tax falls most heavily on those holding money in forms that do not adjust for inflation, such as currency and non-interest-bearing deposits.