A simple 'AK' model of growth is developed in which consumers hold mon
ey to reduce transaction costs associated with their purchases of both
consumption and investment goods. The government is constrained to ch
oosing between an income tax and inflation as means of financing its e
xpenditure. As a result, there is no presumption in favor of Friedman'
s (1969) rule. Numerical simulations are conducted and generally find
a low to moderate welfare maximizing rate of inflation.