Write real seigniorage revenue in terms of inflation rate

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Reference no: EM131221737

Assume that a central bank's nominal seigniorage revenue equals the change in the money supply, denoted ?M. Real seigniorage revenue is ?M/P. Assume the inflation rate equals the growth rate of the money supply, which is ?M/M.

a. What is the rationale for these assumptions? Are they realistic?

b. Write real seigniorage revenue in terms of the inflation rate and the real money supply, M/P.

c. When inflation rises, what happens to the real money supply and to seigniorage revenue?

d. Sometimes a small increase in the government budget deficit produces a large increase in inflation. Explain this fact using the answer to part (c).

Reference no: EM131221737

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