To maintain the same revenue from seigniorage as people avoid the inflation tax, the government should:

• A. increase; raise the same revenue from seigniorage
• B. lower; avoid a budget deficit
• C. lower; raise revenue from seigniorage
• D. increase; raise the same revenue from seigniorage

Answer: (D)

Seigniorage is the revenue the government earns from printing money, captured as the inflation tax on money balances. When people start avoiding the inflation tax, they reduce their money holdings, so the revenue the government gets from seigniorage falls. To keep that revenue at the same level, the government would need to raise the rate of money growth, which increases inflation and boosts the inflation tax revenue back up. In short, increasing the money-growth rate raises seigniorage enough to offset the reduction caused by people avoiding the tax, keeping total revenue the same.