Question

1.       What is the rate of money growth that maximizes seignorage in the economy described in problem 6(b)? (Hint: you learned in problem 6(b) that seignorage, in the medium run, is greater at money growth of 50% than at money growth of 25% or 75%. Start by calculating seignorage for money growth rates near 50%. Increase and then decrease money growth rates by one percentage point until you find the answer.)

Answer 1

The state has the ability to maximize seigniorage by expanding the monetary issue.The amount of seigniorage can be calculated by the formula:

$S=\frac{M*rref}{100}$

M-money supply and rref- refinancing rate