It re-distributes income in favor of the rich people who normally save a greater proportion of their income than the poor people. So, a country would get the much needed savings as a result of inflationary redistribution. It makes available funds for investment and through investment, ensures long term sustainable growth. Due to the above reasons, inflation tax has been liberally used by many governments throughout the world. The evils of the use of inflation tax Though inflation tax has been preferred by many, it has been criticized on many grounds. The first criticism is leveled on the ground that, when governments learn of this easy way of funding budgets, they would tend to ignore the more solid and sustainable forms of raising revenue, namely, through taxation. This type of behavior is known in economics as “moral hazard” behavior. The danger of that behavior is that it deprives the society of the opportunity to carry out public expenditure programs based on a solid resource base. It would reduce the government to the same unfortunate position of a student who has passed all his examinations by cheating. Then, one day when he could no longer do so to pass an examination, he would painfully learn that he has no in-built capability to face it on his own strength. The second criticism has been advanced on the ground of the evils of inflation. They could be summarized as follows: •  Inflation causes the market system to fail in its resource allocation function.
Her sacrifice is a real sacrifice, because she could have enjoyed that time for her own pleasure. In contrast, the government’s real sacrifice is just 5 units of money, the value of real resources it spent on producing the note. So the government enriches itself at the expense of the teacher who now has been given a note with real sacrifice of 5 units for getting eight hours of real services. This type of an unfair transaction is known in economics as an unequal exchange. Why should the teacher agree to this unequal exchange? That is because she is promised that she could acquire a real basket of goods and services worth of 1000 units of money with that paper. For instance, if a kilogram of rice is 1000 units, she is promised one kilo of rice in exchange for eight hours of her time. If this promise is kept, then, there is no problem. But, if such currency is excessively produced, too much money would chase after too little rice and the price of rice would go up in the market. As a result, when the teacher goes to the market, if the price of rice has risen to 2000 units of money, she could now buy only a half of a kilogram of rice. In other words, she has been forced to give up eight hours of her time for half a kilo of rice.