Question

Assume that the demand for real money balance is:
M/P= Y[0.6-(r+pe
)]
Income, Y= 1000. Real Interest Rate, r = 0.05 (5%)
Expected Inflation Rate pe is constant at 0.05% (5%)
calculate the seignorage if the rate of growth of nominal money rate is 7%

Answer 1

Answer:

I am sorry

Explanation:

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Answer 2

Given:

Real Money Balance = M/P = Y[0.6 - (r + πe)]

Income = Y = 1000

Real Interest Rate = r = 0.05

Expected Inflation Rate = πe = 0.05

Growth rate of nominal money = (ΔM/M) = 7% = 0.07

To find:

Seignorage.

Solution:

We can solve the problem by using the direct formula for Seignorage (S).

S = (M/P)*(ΔM/M)

where

(M/P) = 1000*[ 0.6- (0.05+0.05)]

= 1000*( 0.6 - 0.1 )

= 1000*(0.5)

=500

Thus, we have

S = 500*(0.07)

= 35

Hence, Seignorage = 35