Answer to Question #211196 in Macroeconomics for lex

Question

Consider a government that runs a budget deficit of 20% of real income and decides to finance it through seigniorage. If people hold real balances equal to 3 months of income what is the monthly growth of money supply that will finance the deficit?

Answer 1

Consider a government that runs a budget deficit of 20% of real income and decides to finance it through seigniorage. If people hold real balances equal to 3 months of income the monthly growth of money supply that will finance the deficit will fall

Because even though government try to increase the money supply and finance budget deficit through seignorage, people are holding triple real balances than increase in money supply

Suppose government makes money about $6000, buy people hold their real balances by $18000.