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Cost to the public of the inflation tax

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Reference no: EM131159934

Consider an economy that has the following monetary data:

Currency in circulation=$300

Bank reserves=$50

Monetary base=$350

Deposits=$700

Money supply=$1000

The monetary base and the money supply are expected to grow at a constant rate of 20% per year. Inflation and expected inflation are 20% per year. Suppose that bank reserves and currency pay no interest, all currency is held by the public, and bank deposits pay no interest.

a. What is the cost to the public of the inflation tax?

b. What is the nominal value of seignorage over the year?

c. What is the profit to the banks from the inflation?

Reference no: EM131159934

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