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

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

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

$MP=500$

Given the rate of growth of nominal money and the rate of inflation, we can find the real rate of interest;

Real rate of interest= nominal rate of money growth plus rate of inflation.

$=7+0.05$

$=7.05$

To find seinorage, we multiply MP by 7.05

$=500\times7.05$

$=3525$