Question 2 Suppose that the government has the following nominal budget constraint. G = T+AB+ AMS The above equation means that government spending (G) is financed by taxes (T), bond (B) changes or/and money supply (M$) changes. Suppose that the government spending is only financed by th revenue from a money supply change, which is called seigniorage gain. The real seigniorage gain, S is defined as S = AMS/P. a. Show that S = μ·f (Y, i) where the growth rate of money supply is given by µ, and Md real money demand = f(Y, i) and i=r+µ. P b. Interpret the condition, S = µ · L(Y, i), based on the statement "inflation is a tax.” = 0, respectively? Interpret the ds C. Under what conditions, ds > 0, ἀμ ds < 0, and ἀμ dμ results.

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Question 2 Suppose that the government has the following nominal budget constraint.
G = T+AB + AMS
The above equation means that government spending (G) is financed by taxes (T), bond (B) changes,
or/and money supply (MS) changes. Suppose that the government spending is only financed by the
revenue from a money supply change, which is called seigniorage gain. The real seigniorage gain, S,
is defined as S : AMS/P.
Show that S = μ·f (Y, i) where the growth rate of money supply is given by µ, and
Md
real money demand = f(Y, i) and i=r+μ.
P
=
b. Interpret the condition, S
Under what conditions,
ds
C.
dμ
results.
a.
µ· L(Y, i), based on the statement "inflation is a tax."
ds
ds
< 0, and = 0, respectively? Interpret the
dμ
dμ
> 0,
Transcribed Image Text:Question 2 Suppose that the government has the following nominal budget constraint. G = T+AB + AMS The above equation means that government spending (G) is financed by taxes (T), bond (B) changes, or/and money supply (MS) changes. Suppose that the government spending is only financed by the revenue from a money supply change, which is called seigniorage gain. The real seigniorage gain, S, is defined as S : AMS/P. Show that S = μ·f (Y, i) where the growth rate of money supply is given by µ, and Md real money demand = f(Y, i) and i=r+μ. P = b. Interpret the condition, S Under what conditions, ds C. dμ results. a. µ· L(Y, i), based on the statement "inflation is a tax." ds ds < 0, and = 0, respectively? Interpret the dμ dμ > 0,
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