ABSTRACT
There are a number of different economic theories of inflation, which are based on different assumptions and tell different stories. There is a significant impact of money growth on inflation, which is one-to-one in a number of countries such as the United States; however, countries with low and stable inflation have weak relationships between money growth and inflation. The second oldest theory of inflation is the celebrated Phillips curve. The Phillips curve has been intertwined with a number of very important macroeconomic, macro-econometric, and monetary policy literatures. Expected inflation, whether it is lagged inflation or a function of a wider set of variables as in rational expectations, has a significantly larger coefficient than the coefficient of the output gap. Economic theory predicts that a permanent increase in the tax rate causes the aggregate demand curve to shift down thus reducing investment demand and consumption, hence reducing real output.
