a)
To plot:Graphical representation of inflation rates.
a)
Answer to Problem 8NP
Explanation of Solution
Given Information:
Given the following information:
L = 0.2Y-500i
L = M/P
Y = 1000
r = 0.04
i = r + inflation(p)
Where,
i is the nominal interest rate
r is the real interest rate
M is the nominal money supply
L is the real money
Substitute the value of nominal interest rate into the equation of real money demand to get:
Since at equilibrium L = M/P, therefore,
Formula to calculate seignorage revenue is:
Substituting equation (1) in the above equation to get
Plotting the above equation for values of p = 0, 0.02, 0.04...0.3 in the form of a graph gives the following:
Table-1
Inflation | Revenue |
0 | 0 |
0.02 | 3.4 |
0.04 | 6.4 |
0.06 | 9 |
0.08 | 11.2 |
0.1 | 13 |
0.12 | 14.4 |
0.14 | 15.4 |
0.16 | 16 |
0.18 | 16.2 |
0.2 | 16 |
0.22 | 15.4 |
0.24 | 14.4 |
0.26 | 13 |
0.28 | 11.2 |
0.3 | 9 |
Introduction:
Inflation is the persistent increase in
b)
Inflation rate that maximizes seignorage.
b)
Answer to Problem 8NP
Inflation rate that maximizes seignorage is 0.18.
Explanation of Solution
Given Information:
L = 0.2Y-500i
L = M/P
Y = 1000
r = 0.04
i = r + inflation(p)
Where,
i is the nominal interest rate
r is the real interest rate
M is the nominal money supply
L is the real money demand
Inflation | Revenue |
0 | 0 |
0.02 | 3.4 |
0.04 | 6.4 |
0.06 | 9 |
0.08 | 11.2 |
0.1 | 13 |
0.12 | 14.4 |
0.14 | 15.4 |
0.16 | 16 |
0.18 | 16.2 |
0.2 | 16 |
0.22 | 15.4 |
0.24 | 14.4 |
0.26 | 13 |
0.28 | 11.2 |
0.3 | 9 |
As it can be seen from the above table, value of seignorage revenue gets maximized at the inf1ation rate of 0.18.
Introduction:
Inflation is the persistent increase in price level over a short period of time.
c)
Maximum amount of seignorage revenue.
c)
Answer to Problem 8NP
The maximum amount of seignorage that is earned is 16.2 units.
Explanation of Solution
Given Information:
L = 0.2Y-500i
L = M/P
Y = 1000
r = 0.04
i = r + inflation(p)
Where,
i is the nominal interest rate
r is the real interest rate
M is the nominal money supply
L is the real money demand
Inflation | Revenue |
0 | 0 |
0.02 | 3.4 |
0.04 | 6.4 |
0.06 | 9 |
0.08 | 11.2 |
0.1 | 13 |
0.12 | 14.4 |
0.14 | 15.4 |
0.16 | 16 |
0.18 | 16.2 |
0.2 | 16 |
0.22 | 15.4 |
0.24 | 14.4 |
0.26 | 13 |
0.28 | 11.2 |
0.3 | 9 |
The maximum amount of seignorage that is earned is 16.2 units by referring to above table.
Introduction:
Total revenue is calculated by multiplying price into Quantity. It is the sale amount which is earned.
d)
Graphical representation of inflation rates, maximum value of inflation and revenue when Y = 1000 and r 0.08.
d)
Answer to Problem 8NP
Revenue of seignorage is maximized (at the value of 12.8) at inflation rate of 0.16.
Explanation of Solution
Given Information:
L = 0.2Y-500i
L = M/P
Y = 1000
r = 0.08
i = r + inflation(p)
Where,
i is the nominal interest rate
r is the real interest rate
M is the nominal money supply
L is the real money demand
At equilibrium L = M/P, therefore,
For Y = 1000 and r = 0.08 gives the result as:
Table-2
Inflation | New Revenue |
0 | 0 |
0.02 | 3 |
0.04 | 5.6 |
0.06 | 7.8 |
0.08 | 9.6 |
0.1 | 11 |
0.12 | 12 |
0.14 | 12.6 |
0.16 | 12.8 |
0.18 | 12.6 |
0.2 | 12 |
0.22 | 11 |
0.24 | 9.6 |
0.26 | 7.8 |
0.28 | 5.6 |
0.3 | 3 |
Revenue of seignorage is maximized (at the value of 12.8) at inflation rate of 0.16.
Introduction:
Inflation is the persistent increase in price level over a short period of time.
Want to see more full solutions like this?
- Which answer do you guys think is the correct one?arrow_forwardCorrect answer will be surely upvoted.Please answer fast i need it ASAP.arrow_forwardShow the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the following graph. INTEREST RATE 100 5 m 2 1 0 0 5 Money Supply Money Demand 10 15 20 MONEY (Billions of dollars) 25 30 Money Demand Money Supply (?)arrow_forward
- Answer the question based on the following information: For transactions, households and businesses want to hold an amount of money equal to one-half of nominal GDP. The table shows the amounts of money they want to hold as an asset at various interest rates. If nominal GDP is $300 and the supply of money is $210, the equilibrium interest rate will be Interest Rate Amount of Money Demanded as an Asset 10% $20 8 40 6 60 4 80 2 100 Multiple Choice 4 percent. 6 percent. 10 percent. 2 percent. 8 percentarrow_forwardThe supply of credit cards is given by q = 1400X, where X are real credit card balances, q isthe real price of the credit card balance. You also know that R = 0.05 (nominal interest rate)and P = 100. Answer the following questions about this:(a) If the money supply is M s= $5, 000, if P = 100 is the equilibrium price level, find Y (realoutput).(b) Suppose that the Federal Reserve Bank decides to increase the money supply by 10%.How much is the inflation rate as a result? Explain and justify your answer. (c) Further suppose that at the same time, real output, Y , increases by 10%. Now what isthe inflation rate? Does our quantity theory of money hold here? Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forwardSuppose that the nominal interest rate is zero, that is, R= 0. a. In this case, in terms of real income Y and the price level P, the real equilibrium quantity of credit card balances isarrow_forward
- In 2013, Prussia's aggregate demand curve was determined by the equation M + 0 = 4%. A change in aggregate demand means that in 2014, Prussia's aggregate demand curve was determined by the equation M + U = 7%. Using this information, draw Prussia's old and new dynamic aggregate demand curves on the graph. Inflation rate 14 13 12 11 10 9 8 7 4 3 2 1 0 -4 -3 2-1 0 1 2 3 4 5 Real GDP growth rate AD 2013 AD 2014 6 7 8 9 10 Which of the factors could have resulted in the change in aggregate demand seen between 2013 and 2014? higher consumer confidence an improvement in technology O a decrease in oil prices an increase in importsarrow_forwardAssume the money demand function for this economy is a function of income (Y) and a constant (k) in the following way: Demand for Money = kY In 2015, real money balances were .............. This implies that people want to hold ............. of every euro of income in the form of money.arrow_forwardLabor supply: Nt= 90 Capital stock: Kt = 90 Government spending: Gt = 20 Tax collections: Tt = 20 Production function: Yt = 2(Kt)0.5 (Nt)0.5 Real money demand Lt = 2Yt - 200rt Consumption function: Ct = 16 + 0.8(Yd)t Domestic price level: Pt = 4 Investment function: It = 25 - 50rt Nominal money supply: Mt = 1296 QUESTIONS: Find an expression for the IS curve. Find an expression for the LM curve. Find an expression for the aggregate demand curve. What are the short run equilibrium values for output, interest rate and price level? Plot (a)-(d) on the IS-LM and AD-SRAS-LRAS diagrams. Make sure to label (i) the axes, (ii) the curves and (iii) the initial equilibrium levels. Is this a short-run level of output also a long-run equilibrium? Explain. Suppose that the government decreases taxes to T=10. Find the new short-run equilibrium levels of output and interest rate Find the long-run equilibrium levels of output, interest rates and prices. Graph this combination of policies…arrow_forward
- Explain how an increase in government expenditure can affect the goods market and moneymarket by taking the link between the two markets into account.arrow_forwardUse the diagrams below to answer the following questions. Figure 27-5 Interest Rate Price Level 5% 4% 2% 1% 105 102 100 500 540 754 800 806 M Mo Quantity of Money (5) ADI AD Real GDP (Shillo)arrow_forwardBoth graphs show a demand for money curve. In the left graph, draw a point to show the quantity of money demanded when the interest rate is 5 percent. Show the effect of an increase in the nominal interest rate. Draw either an arrow along the curve showing the direction of change, or a new demand for money curve. In the right graph, draw a point to show the quantity of money demanded when the interest rate is 5 percent. Show the effect of an increase in real GDP. Draw either an arrow along the curve showing the direction of change, or a new demand for money curve. >>> Dra only the objects specified in the question. Interest rate (percent per year) 6.5- 6.0- 5.5- 5.0- 4.5- 4.0- MDO 3.5+ 2.7 2.8 2.9 3.0 3.1 3.2 3.3 Real money (trillions of 2009 dollars) Q 6.5 6.0- 5.5- 5.0- 4.5- 4.0- Interest rate (percent per year) MDO 3.5+ 2.7 2.8 2.9 3.0 3.1 3.2 3.3 Real money (trillions of 2009 dollars) Qarrow_forward
- Macroeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506756Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage LearningEconomics: Private and Public Choice (MindTap Cou...EconomicsISBN:9781305506725Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning