Consider an economy with a constant population of N = 1,000. Individuals are endowed with y = 20 units of the consumption good when young and nothing when old. All seigniorage revenue is used to finance government expenditures. There are no subsidies and no taxes other than seigniorage. Suppose that preferences are such that each individual wishes to hold real balances of fiat money worth
a. Use the equality of supply and demand in the money market to find the total real balances of fiat money in a stationary equilibrium as a function of the rate of fiat money creation z.
b. Use your answer in part a to find total seigniorage revenue as a function of z. Graph this function and explain its shape.
