You are central bank governor of Economia, a mythical country, where inflflation is

currently equal to 100% per month. You have been told by the government that you

need to increase seignorage in order to fifinance 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).

(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 "Laffffer curve"

and use it to answer this question.)