1 Question

You are central bank governor of Economia, a mythical country, where inflation is currently equal to 100% per month. You have been told by the government that you need to increase seignorage in order to finance additional government expenditures. Unsure how to respond, you call in your two most trusted economic advisors. Advisor 1 tells you that you ought to raise the money growth rate. The other advisor, Advisor 2, tells you that you ought to reduce the money growth rate.

(a) Explain the concept of seignorage, both in words and formally (e.g. alge- braically). (5 points)

(b) Which of the two recommendations is correct when, as stated, your objective is to increase seignorage? Why? (Hint: look up the concept of the “Laffer curve”  and use it to answer this question.) (7 points)

2 Question

Explain briefly how the Australian IS curve is likely to be affected in the short-run by each of the following: (3 points each)

a) High energy prices following the Ukraine war are pushing Europe into a deep recession.

b) Mortgage lenders raise interest rates in response to an increase in the RBA’s policy rate.

c) The government decides to reduce the size of its armed forces from 85,000 to 55,000.

d) There is a pandemic and house prices rise much faster than anticipated.

e) The long-run interest rate rises.