ment rather than low inflation. If a society values low unemployment, then the optimal rate of inflation will be somewhat higher; if society dislikes inflation, then the optimal rate will be lower and unemployment will be higher. The final theory of inflation comes from public finance. Inflation constitutes a tax on money. In effect, it decreases the purchasing power of real money balances, and to sustain purchasing power, agents need to acquire more real money. Since the government controls the supply of money, consumers or agents must acquire new money from the government by selling resources in return. An inflation tax is influential because it increases government revenues, and governments can therefore reduce other taxes like the income tax, thereby providing additional incentive to work. This, consequently, raises output and lowers unemployment, so that a negative relationship between inflation and unemployment can be observed (Graph 4). On the other hand, if government pushes the inflation rate too high, the public has an incentive to reduce their real money supply and reduce their exposure to the inflation tax. New expenditures to avoid the inflation tax are sought and these expenditures lower output and raise unemployment. Zero inflation is frequently said to be the optimal rate of inflation, and the Federal Reserve's stated goal of a price-level stability suggests this may also be the official view. Nonetheless, the Fed also clings to the theory of the non-accelerating inflation rate of unemployment even though this theory provides no valid reasons for a zero-inflation goal, since it states that all rates of inflation are equally optimal. The Fed.'s commitment to zero inflation is driven, therefore, by political considerations.Understanding the Fed.'s position requires introducing political considerations. Talking about a socially optimal rate of inflation is talk about a unified national interest. In reality tho...
