Real seigniorage is defined as:

• A. rate of growth of the money supply times the real money supply
• B. real interest rate times the money supply
• C. rate of growth of the money supply divided by the price index
• D. real interest rate minus the inflation rate

Answer: (D)

Real seigniorage is the revenue the government gains from issuing money, expressed in real terms as the inflation tax on money holders. When the price level rises, money balances lose purchasing power, and the government effectively collects revenue equal to that loss in real terms. In this framing, the size of the real gain from money creation depends on the return households could obtain from alternative assets (the real interest rate) minus the erosion from inflation. That net real gain is the real seigniorage, which is captured by the real interest rate minus the inflation rate.

The other formulations mix nominal quantities or wrap in the price level in ways that don’t directly measure the real, annual revenue the government earns from money creation. Thus, the best way to express real seigniorage is the real interest rate less the inflation rate.