Question

2. In the period between 2000 and 2007, China had inflation rates of about 5% per year, and GDP growth rates of about 11% per year.

a) Assuming that velocity of money did not change over that period, how fast did the money supply grow?

b) M0 (reserve money) was about 10% of GDP, how much seigniorage did the Central Bank earn as a percentage of GDP?

Answer 1

a)

The quantity theory of money equation is given as

In this equation, is the growth rate of money supply, is the inflation, and growth rate of GDP

During that time the money supply grew by 16%.

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b)

seigniorage revenue formula is given as

Here is the growth rate of money supply, and is money as a percentage of GDP