Question

b) Assume that the demand for real money balances is:
MP = Y[0.6-(r+e)
Income, y =1000 real rate of intrest= 0.05
Expected inflation rate is e is constant 0.05
Calculate seinorage if the rate of growth of nominal money is 7%

Answer 1

$MP= Y[0.6-(r+e)]$

$MP= 1000[0.6-(0.05+0.05)]$

$MP=500$

We find real interest rate when nominal growth rate is 7% =Nominal Rate+ Inflation Rate.

$= 7+0.05=7.05$

Seinorage$= 500\times7.05$

= 3525