Consider an economy that has the following monetary data:
Currency in circulation=$300
Bank reserves=$50
Monetary base=$350
Deposits=$700
Money supply=$1000
The monetary base and the money supply are expected to grow at a constant rate of 20% per year.Inflation and expected inflation are 20% per year.Suppose that bank reserves and currency pay no interest,all currency is held by the public,and bank deposits pay no interest.What is the profit to the banks from the inflation?

Question

Quizplus · Accepted Answer

The profit to the banks from inflation is the difference between the growth in the money supply and the growth in the monetary base. The money supply grows by $200 (20% of $1000), and the monetary base grows by $70 (20% of $350). The profit is $200 - $70 = $130.

Consider an Economy That Has the Following Monetary Data