Final answer:
Politicians may prefer inflation because it can lead to an increase in tax revenues. This happens as inflation causes nominal incomes to rise, possibly leading to higher taxation through 'bracket creep' or because the tax system does not adjust for inflation.
Step-by-step explanation:
Politicians may like inflation because tax revenues typically D) Increase. This effect occurs due to what's sometimes referred to as 'bracket creep,' where inflation pushes incomes into higher tax brackets, thus increasing the amount of tax paid by individuals even if tax rates don't change. Additionally, if nominal incomes increase due to inflation, and the tax system is not fully indexed to account for this inflation, the tax burden on individuals and businesses increases, which in turn raises more revenue for the government.
The concept you're touching on is related to the insights provided by economist Arthur Laffer. He pointed out that there can be a counterintuitive effect where income tax revenue can go up when tax rates go down. This is because lower tax rates can stimulate economic growth, leading to more income to be taxed overall. Higher economic activity translates to more taxable transactions and potentially more revenue for the government, despite the lower individual tax rate.