Whether real seignorage revenue increases when the rate of money growth increases depends on whether

Whether real seignorage revenue increases when the rate of money growth increases depends on whether

a. the rise in the real supply of currency outweighs the decline in inflation.
b. the rise in inflation ratio outweighs the decline in the real supply of currency.
c. the rise in inflation outweighs the decline in real money holdings.
d. the rise in real money holdings outweighs the decline in inflation.


Answer: C

Consider an economy that has the following monetary data.

Consider an economy that has the following monetary data.

Currency held by the nonbank public = $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 nominal value of seignorage over the year?

a. $70
b. $10
c. $60
d. $200




Answer: A

Consider an economy that has the following monetary data.

Consider an economy that has the following monetary data.

Currency held by the nonbank public = $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 cost to the public of the inflation tax?



a. $140
b. $60
c. $200
d. $190




Answer: C

Real money demand in the economy is given by L = 0.5Y - 2500i, where Y is real income and i is the nominal interest rate. In equilibrium, real money demand L equals real money supply M/P. Suppose that Y equals 1000 and the real interest rate is 0.02. What is the maximum amount of seignorage revenue?

Real money demand in the economy is given by
L = 0.5Y - 2500i,
where Y is real income and i is the nominal interest rate. In equilibrium, real money demand L equals real money supply M/P. Suppose that Y equals 1000 and the real interest rate is 0.02. What is the maximum amount of seignorage revenue?

a. 22.25
b. 20.25
c. 24.75
d. 11.11



Answer: B

Real money demand in the economy is given by L = 0.5Y - 2500i, where Y is real income and i is the nominal interest rate. In equilibrium, real money demand L equals real money supply M/P. Suppose that Y equals 1000 and the real interest rate is 0.02. At what rate of inflation is seignorage maximized?

Real money demand in the economy is given by
L = 0.5Y - 2500i,
where Y is real income and i is the nominal interest rate. In equilibrium, real money demand L equals real money supply M/P. Suppose that Y equals 1000 and the real interest rate is 0.02. At what rate of inflation is seignorage maximized?

a. 0.10
b. 0.075
c. 0.05
d. 0.09



ANS: D

Assume that in an all-currency economy the real interest rate is 4%, the expected rate of inflation is 8%, and the nominal interest rate is 12%. The real monetary base equals $50 billion. The real seignorage revenue collected by the government would equal

Assume that in an all-currency economy the real interest rate is 4%, the expected rate of inflation is 8%, and the nominal interest rate is 12%. The real monetary base equals $50 billion. The real seignorage revenue collected by the government would equal

a. $4 billion.
b. $12 billion.
c. $8 billion.
d. $6 billion.



Answer: A

The real seigniorage collected by the government in an all-currency economy is the product of

The real seigniorage collected by the government in an all-currency economy is the product of

a. the debt/GDP ratio and the rate of inflation.
b. the rate of inflation and the real money supply.
c. the rate of inflation and the real supply of government bonds.
d. the debt/GDP ratio and the real money supply.



Answer: B

In an all-currency economy in which real output and the real interest rate are fixed and the rates of money growth and inflation are constant, the inflation rate equals

In an all-currency economy in which real output and the real interest rate are fixed and the rates of money growth and inflation are constant, the inflation rate equals

a. the nominal interest rate.
b. the level of real seignorage revenue.
c. the real interest rate.
d. the growth rate of the nominal money supply.

Answer: D

State governments in the United States can raise revenue by all the following means except

State governments in the United States can raise revenue by all the following means except

a. increasing the money supply.
b. increasing sales taxes.
c. increasing income taxes.
d. increasing taxes on corporate profits.



Answer: A

In which case would you be most likely to expect inflation to occur?

In which case would you be most likely to expect inflation to occur?

a. The government runs a sustained government deficit by increasing purchases.
b. The government runs a sustained government deficit by lowering taxes.
c. The government funds its sustained deficit by increasing the money supply.
d. The government runs a sustained primary deficit by increasing purchases.



Answer: C

The relationship between the government deficit and the change in the monetary base is

The relationship between the government deficit and the change in the monetary base is

a. deficit equals change in government debt held by the public plus change in monetary base.
b. deficit equals change in government debt outstanding plus change in monetary base.
c. deficit equals change in government debt held by the public minus change in monetary base.
d. deficit equals change in government debt outstanding minus change in monetary base.




Answer: A

Seigniorage is the revenue a government raises by

Seigniorage is the revenue a government raises by

a. borrowing money.
b. charging fees for services.
c. taxation.
d. printing money.



Answer: D

Deficits are a burden on future generations if they

Deficits are a burden on future generations if they 

a. are always a primary government deficit.
b. are not used for government capital formation.
c. cause national saving to fall.
d. cause higher rates of inflation to occur.



Answer: C

According to the Ricardian equivalence proposition, current deficits

According to the Ricardian equivalence proposition, current deficits

a. will affect both consumption and national saving.
b. will not affect consumption or national saving.
c. will affect national saving but not consumption.
d. will affect consumption but not national saving.



Answer: B

A decreased government deficit created by a lump-sum tax increase will increase national saving if

A decreased government deficit created by a lump-sum tax increase will increase national saving if

a. the real interest rate is less than the growth rate of real GNP.
b. it causes consumption to fall.
c. the government runs a primary surplus as a result.
d. the value of government bonds outstanding grows slower than the public's wealth.





Answer: B

If the deficit is 0.02 times GDP, the existing debt/GDP ratio is 0.5, and the growth rate of nominal GDP is 0.03, then the change in the debt-GDP ratio is

If the deficit is 0.02 times GDP, the existing debt/GDP ratio is 0.5, and the growth rate of nominal GDP is 0.03, then the change in the debt-GDP ratio is

a. +0.05
b. -0.025.
c. 0.0
d. +0.025.




Answer: A

Increases in the debt-GDP ratio are primarily caused by

Increases in the debt-GDP ratio are primarily caused by

a. a high government deficit relative to GDP.
b. a high growth rate of GDP.
c. increases in interest rates.
d. increases in government borrowing through bonds.




Answer: A

The total value of government bonds outstanding at any particular time is called the

The total value of government bonds outstanding at any particular time is called the

a. government debt.
b. seignorage revenue.
c. yield curve.
d. government deficit.




Answer: A

The average cost of the distortion created by taxes

The average cost of the distortion created by taxes

a. increases proportionately with the tax rate.
b. is higher when the tax rate is constant than when it fluctuates.
c. is lower when the tax rate is constant than when it fluctuates.
d. equals the square root of the tax rate.



Answer: C

Assume that the lost output due to tax distortions is proportional to the square of the tax rate. If the average cost of the distortion created by taxes is currently $1000, and the tax rate is increased from 40% to 50%, the average cost of the distortion created by taxes will increase to

Assume that the lost output due to tax distortions is proportional to the square of the tax rate. If the average cost of the distortion created by taxes is currently $1000, and the tax rate is increased from 40% to 50%, the average cost of the distortion created by taxes will increase to

a. $640.
b. $383.33.
c. $450.00.
d. $1562.50.



Answer: D