Consider an economy in which the money supply consists of both currency and deposits. The growth rate of the monetary base, the growth rate of the money supply, inflation, and expected inflation all are constant at 10% per year. Output and the real interest rate are constant. Monetary data for this economy as of January 1, 2016, are as follows: Currency held by nonbank public $200 Bank reserves $50 Monetary base $250 Deposits $600 Money supply $800 a. What is the nominal value of seignorage over the year? (Hint: How much monetary base is created during the year?) b. Suppose that deposits and bank reserves pay no interest, and that banks lend deposits not held as reserves at the market rate of interest. Who pays the inflation tax (measured in nominal terms), and how much do they pay? (Hint: The inflation tax paid by banks in this example is negative.) c. Suppose that deposits pay a market rate of interest. Who pays the inflation tax, and how much do they pay?
Consider an economy in which the money supply
consists of both currency and deposits. The growth
rate of the monetary base, the growth rate of the
money supply, inflation, and expected inflation all
are constant at 10% per year. Output and the real
interest rate are constant. Monetary data for this
economy as of January 1, 2016, are as follows:
Currency held by nonbank public $200
Bank reserves $50
Monetary base $250
Deposits $600
Money supply $800
a. What is the nominal value of seignorage over the
year? (Hint: How much monetary base is created
during the year?)
b. Suppose that deposits and bank reserves pay no
interest, and that banks lend deposits not held as
reserves at the market rate of interest. Who pays
the inflation tax (measured in nominal terms),
and how much do they pay? (Hint: The inflation
tax paid by banks in this example is negative.)
c. Suppose that deposits pay a market rate of interest.
Who pays the inflation tax, and how much do
they pay?
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