First, explain what seignorage is. Second, write out and explain the expression that represents seignorage. And finally, what policies can a central bank implement to increase seignorage?
What will be an ideal response?
Seignorage is the revenue from money creation measured in real terms, seignorage equals ΔH/P. This expression can be rearranged to yield: (ΔH/H)(H/P). The first term is simply the rate of growth of nominal money and the second term is real money balances. To increase seignorage, the central bank can increase the rate of growth of H, assuming H/P does not change.
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