Real money demand in an economy is
L = 0.2Y - 500i,
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 is 1000 and the real interest rate r is 0.04.
a. Draw a graph with real seignorage revenue on the vertical axis and inflation on the horizontal axis. Show the values of seignorage for inflation of 0,0.02, 0.04, 0.06,..., 0.30.
b. What inflation rate maximizes seignorage?
c. What is the maximum amount of seignorage revenue?
d. Repeat parts (a) to (c) for Y = 1000 and r = 0.08.