Macroeconomics 12th Edition by Rudiger Dornbusch ,Stanley Fischer,Richard Startz

Exercise 5

Suppose the money base is 10 percent of GDP. Suppose also that the government is considering raising the inflation rate from 0 to 10 percent per annum and believes that doing so will increase government revenue by 1 percent of GDP. Explain why the government must be overestimating the revenue it will receive from the resulting inflation tax.