The Government Can Increase Revenues from an Inflation Tax Only

Multiple Choice

The government can increase revenues from an inflation tax only up to some maximum, beyond which higher inflation rates result in lower tax revenues, since

A) higher tax rates create a work disincentive
B) people will hold their wealth in the form of cash to avoid the inflation tax
C) banks will hold more excess reserves for precautionary reasons
D) individuals will hold less currency and banks fewer excess reserves and therefore the monetary base will shrink
E) many people will refuse to pay their taxes