If the money supply is 2000, the price level is 20, and the inflation rate is 50%, what is the amount of seigniorage?
A) 100
B) 50
C) 10
D) 5

Question

Quizplus · Accepted Answer

Seigniorage is the revenue the government earns by printing money. It is calculated as the percentage change in the money supply multiplied by the price level. In this case, the percentage change in the money supply is 50% (given as the inflation rate). Therefore, seigniorage = 50% * 2000 = 1000. However, since the question asks for the amount of seigniorage per unit of money supply, we divide this by the money supply: 1000/2000 = 0.5 or 50 cents per dollar. Thus, the best answer is B, since it represents the amount of seigniorage per dollar of money supply.

If the Money Supply Is 2000, the Price Level Is