inflation tax

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The effect of inflation on the real value of money and government debt denominated in money terms. For example, if the population of a country hold money equal in value to 10 percent of gross national product (GNP) and government debt equal in value to 30 percent of GNP, annual inflation of 10 percent removes an amount equal to 1 percent of GNP from the real purchasing power of their money balances, and an amount equal to 3 percent of GNP from the real value of their security holdings. This is equivalent to a tax of 4 percent of GNP. The government can incur a nominal budget deficit equal to the yield of the inflation tax without increasing the real value of its debts, including issue of fiat money.

Subjects: Economic History.

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