Suppose that the amounts of real government spending, G, equals 700, real high-powered money, H/P, equals 1,500,

Question:

Suppose that the amounts of real government spending, G, equals 700, real high-powered money, H/P, equals 1,500, and real government bonds, B/P, equals 2,000. The rate of inflation equals 5 percent and the nominal interest rate equals 7.5 percent.
(a) What is the amount of seignorage (inflation tax)?
(b) What is the real interest rate?
(c) What is the real interest on bonds?
(d) Using equation (10.11), what is the amount of taxes that keeps the real value of bonds and high-powered money fixed?
(e) Suppose that rate of inflation decreases to 4 percent. What is the new amount of seignorage?
(f) Suppose that the holds. Given the lower inflation rate, what is the amount taxes must be raised or the amount government spending must be cut in order to keep the real value of bonds and high-powered money fixed? Fisher Effect
The Fisher Effect is an economic theory created by economist Irving Fisher that describes the relationship between inflation and both real and nominal interest rates. The Fisher Effect states that the real interest rate equals the nominal interest...