Q. The term “seigniorage” is associated with which of the following?

[A] Inflation tax

[B] Tax on gold imports

[C] Tax on elite goods

[D] Deflation tax

Answer: A

Explanation: Inflation erodes the value of money and the people who hold currency suffer in this process.

  • As the governments have authority of printing currency and circulating it into the economy (as they do in the case of deficit financing), this act functions as an income to the governments.
  • This is a situation of sustaining government expenditure at the cost of people’s income.
  • This looks as if inflation is working as a tax. That is how the term inflation tax is also known as seigniorage.
  • It means, inflation is always the level to which the government may go for deficit financing—level of deficit financing is directly reflected by the rate of inflation.

Source: TMH ramesh Singh