Economics

Running head: ECONOMICS
Economics
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ECONOMICS
Answer 1
Part a
Seigniorage is the profit that is made by the government by issuing currency, it can be also
termed as the difference between present between the face value of coins and their products
(Dmitriev and Kersting 2016). When seigniorage is positive in nature, the government will be
making an economic profit while when seigniorage is negative it will lead to economic loss. It is
creation of money in order to finance the deficits in the country. In case of discrete time mode
the seigniorage in the period t is provided by
Mt −M t −1
Pt
It is therefore known as the real resources acquired by the government increases in the balance of
the nominal money which they want to hold. The seigniorage can also be expressed as
Mt −M t −1
Pt
Here m = M/P.
Part b
The government should be increasing the money growth till T* of the laffer curve where it can
earn revenue and then after T* the government should reduce the money growth for controlling
inflation.

ECONOMICS
The laffer curve shows that there is a relationship between the expenditure of government which
is known to encourage the economic activities.
The inflation tax of the seigniorage helps the government to earn more revenue and the rate of
tax will promote the optimum tax rate. The laffer curve shows that the inflation is known to hurt
the economy as it increases the volatility of the market supply.
When he government will be increasing seigniorage till T*, it might lead to hyperinflation which
can lead to political instability in the economy. Therefore the best way to regulate inflation is
controlling the growth of money. In case when the tax base will be low the government will
advise the Governor for printing more cash in the economy.
Answer 2
Part a
There is recession in Europe