Principles of Economics- Mankiw (5th) 618

Principles of Economics- Mankiw (5th) 618 - 638 PA R T T E...

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638 PART TEN MONEY AND PRICES IN THE LONG RUN THE INFLATION TAX If inflation is so easy to explain, why do countries experience hyperinflation? That is, why do the central banks of these countries choose to print so much money that its value is certain to fall rapidly over time? The answer is that the governments of these countries are using money cre- ation as a way to pay for their spending. When the government wants to build roads, pay salaries to police officers, or give transfer payments to the poor or el- derly, it first has to raise the necessary funds. Normally, the government does this by levying taxes, such as income and sales taxes, and by borrowing from the pub- lic by selling government bonds. Yet the government can also pay for spending by simply printing the money it needs. When the government raises revenue by printing money, it is said to levy an inflation tax. The inflation tax is not exactly like other taxes, however, because no one receives a bill from the government for this tax. Instead, the inflation tax is
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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