Macroeconomics

F I G U R E

4 - 1

Growth in money supply (percent)

1970s

1910s

1940s

1980s

1960s

1950s

1990s

2000s

1930s

1920s

1870s

1890s

1880s

1900s

Inflation rate 

(percent)

0 2

4

6

8

10

12

8

6

4

2

0

−2

−4

---

not in the short run. We examine the short-run impact of changes in the

quantity of money when we turn to economic fluctuations in Part Four of

this book. 

■

4-3

Seigniorage: The Revenue 

from Printing Money

So far, we have seen how growth in the money supply causes inflation. With

inflation as a consequence, what would ever induce a central bank to increase the

money supply substantially? Here we examine one answer to this question.

Let’s start with an indisputable fact: all governments spend money. Some of

this spending is to buy goods and services (such as roads and police), and some

is to provide transfer payments (for the poor and elderly, for example). A gov-

ernment can finance its spending in three ways. First, it can raise revenue through

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P A R T   I I

Classical Theory: The Economy in the Long Run