Real money demand in the economy is given by
L = 0.5Y - 2500i,
where Y is real income and i is the nominal interest rate. In equilibrium, real money demand L equals real money supply M/P. Suppose that Y equals 1000 and the real interest rate is 0.02. At what rate of inflation is seignorage maximized?
a. 0.10
b. 0.075
c. 0.05
d. 0.09
Answer: D
FIN 201
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