Question

How does the elasticity of demand for consumption matter in determining seigniorage.

Answer 1

Seigniorage leads to a rise in income of government when the government makes expenditure out of newly created money. When new money is released in the market, it sends price shooting up.

If demand is inelastic, people would continue to consume or price will not affect the demand significantly, Thus, the government can garner the revenue significantly.

On other hand, if demand elastic, the economic activities would be affected significantly. There would be a fall in the GDP or economic activities, it would not be good for the government. or Seigniorage would not be successful.