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Monetary - Feb 23 - a bigger piece of the pie but at the...

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Seinorage: Is seignorage an unlimited source of govt. revenue? (Mt-mt-1)vt – real value of seignorage = (1-1/z) Mtvt Mtvt= real value of money(the goods the stock of dollars can buy) seignorge tax base 1-1/z = fraction of real value of money that winds up as govt. revenue seignorage tax rate Solution: 1. Assume that Mtvt is constant The government can tax a maximum of a 100% (points at mtvt) Figure 1: 2. What happens if z increases, then demand for money goes down, the vt goes down, then mtvt goes down. Essentially two things are happening at the same time when you increase the tax rate, you are getting
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Unformatted text preview: a bigger piece of the pie, but at the same time he pie is becoming smaller because people are not going to want to hold as much money as before. It is possible that your pie becomes so small that your revenue actually goes down. Figure 2: Laffer Curve The more severe limit to , as Z increases, individuals in the economy do not want to hold as much money. Decrease in (y-c1t) decrease in total demand for Nt(y-c1t0 decrease value of money vt = decrease vtMt (seignorage tax base)...
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