Money And Inflation - Seigniorage Flashcards
What is seigniorage?
This is simply the profit made by a government via the issuing of the domestic currency. Seigniorage = Face Value - Production Costs.
When does negative seigniorage occur?
Negative Seigniorage occurs when Production Costs > Face Value.
What does the seigniorage laffer curve show?
The seigniorage Laffer Curve states that there is an optimal rate of money supply growth. Initially, increasing the money supply allows for an increase to the seigniorage until it reaches point A (where the government has found a perfect balance whereby the rate of money supply allows them to maximise their revenue). However, after this point increasing the money supply will offset increased inflation; thus decreasing the valuation of money - consequently decreasing the seigniorage. Essentially, the laffer curve helps establish the optimal rate of money supply growth - the issuing of a current is beneficial up to a certain point.
Why may seigniorage be used during a recession?
To counteract recessive periods and low levels of inflation/disinflation. Increasing the money supply in an economy offsets inflation.
What 2 factors does seigniorage consist of?
A Tax Rate
A Tax Base
What does the tax base imply? How does the tax base react to changes in the tax rate/inflation?
The tax base accounts for the real demand for money. Thus as inflation/taxation increases, the demand for real money (tax base) falls. Vice Versa.
Why is inflation often perceived as a form of taxation?
Inflation erodes the real value of money, making the consumer (money holder) worse off. As inflation increases, money holders will look to dispatch and reduces the money they obtain.
