Assume that money demand takes the form:

M/P = = [1 ( + )]

Where Y = 1000 and r = 0.025.

a.Explain what is meant by the term "seignorage".

b.Assume that, in the short run, is constant and equal to 2.5 per cent. Given expected inflation, calculate the amount of seignorage for each rate of money growth M/M listed below:

i.25 per cent

ii.50 per cent

c.In the medium run, = = M/M . , Compute the amount of seignorage associated with the two rates of money growth in part (b). Explain why the answers differ from those in part (b).

i.25 per cent

ii.50 per cent

d.Explain the key reasons why some countries experience hyperinflation. What are the costs?