The real seignorage collected by the government in an all-currency economy is the product of
A)the rate of inflation and the real supply of government bonds.
B)the rate of inflation and the real money supply.
C)the debt-GDP ratio and the real money supply.
D)the debt-GDP ratio and the rate of inflation.

Question

Quizplus · Accepted Answer

Seigniorage is the profit that the government earns by issuing currency. In an all-currency economy, the government's revenue from seigniorage is directly related to the real money supply and the rate of inflation. When the government prints new money, it increases the nominal supply of money, which leads to inflation. The real money supply is adjusted for inflation, and it represents the purchasing power of money. Seigniorage revenue is calculated as the difference between the nominal value of money and the cost of producing and distributing it. Therefore, the real seigniorage earned by the government is the product of the rate of inflation and the real money supply.

The Real Seignorage Collected by the Government in an All-Currency