Question

Consider an economy in which aggregate real money balances is always equal to 1,000,000 goods. What...

Consider an economy in which aggregate real money balances is always equal to 1,000,000 goods. What is the maximum amount of seigniorage that a government could generate in this economy in a single period?

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Answer #1

Seigniorage in simple terms, can be understood as the rate of money growth multiplied by the real money balances.

Or in other terms,

Seigniorage =

It is like a tax on the money balance held.

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Thus, the maximum amount of seigniorage in a single period will be the maximum amount by which money supply can be increased in the short run.

Thus, if the government is unable to print any more money, it will not be able to make any revenue.

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Now, in the short run, if there is no output growth and only money growth, the entire money growth leads to inflation.

Thus, in the short run, if there is no real growth, the inflation rate on real money balances determines the Seigniorage revenue.

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