Consider an economy that has the following monetary data:
Currency in circulation = $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.
a. What is the cost to the public of the inflation tax?
b. What is the nominal value of seignorage over the year?
c. What is the profit to the banks from the inflation?
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