Problem
Real money demand in an all-currency economy with fixed real output and real interest rate, and constant inflation rate and money growth rate is
L = 0.2 Y - 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 rates of 0, 0.02, 0.04, 0.06, c, 0.30.
b. What inflation rate maximizes seignorage?
c. What is the maximum amount of seignorage revenue?
d. Repeat Parts (a)-(c) for Y = 1000 and r = 0.08.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.