Question

Assume that the demand for real money balance is:

M/P-Y[0.6-(r+x)]

Income, Y= 1000. Real Interest Rate, r=0.05(5%)

Expected Inflation Rate is constant at 0.05% (5%)

calculate the seignorage if the rate of growth of nominal money rate is 7%

Answer 1

$Seignorage = Rate of nominal money growth rate x Real money balance$

$ΔM / P = ΔM / M \ M / P$

$ΔM / P = Y[0.6-(r+x)]$

$ΔM / P= {1000(0.6-(0.05+0.07)}/0.05$

$ΔM / P = 9,600$