Real seigniorage is positive when which condition holds?

• A. The real interest rate is negative
• B. The growth rate of the money supply is positive
• C. The real money supply is negative
• D. The inflation rate is zero

Answer: (B)

Real seigniorage is the revenue the government earns from issuing new money, measured in real terms as the change in real money balances (roughly, how much M/P grows). If the money stock grows, new money enters circulation and, all else equal, real money balances rise. That increase in M/P is the source of real seigniorage, so its sign is positive when the money supply grows. Inflation affects the size of that real gain, but the direct driver of positive real seigniorage in this framing is a positive growth rate of the money supply. If the money stock doesn’t grow, or grows only alongside price level increases that keep M/P flat or falling, real seigniorage would not be positive.