Question

What determines the inflation rate in the long run? How might inflation in the long run be related to fiscal policy? What is seigniorage?

Answer 1

Seigniorage is the earings of government  from the production of coins and currency called seigniorage. If the cost of production of coin or currency is less than the face value of a currency is considered as government revenue. Inflation means the continuese falling value of curency and general price level increases called inflation. inflation causes by demand pull and cost pull factors.Demand pull factors are reduced interest rate,higher wages and money supply .cost pull factors are devaluation , increasing VAT and expected inflations . these factrors increase the aggregate demand and push the money supply which causes inflation.

Aggregate demand and Aggregate supply are the reason behind the price changes that means any type of aggregate demand rising shift aggregate money supply this leads to inflation one is Aggregate demand and aggregate supply increase the money supply which also aggregate demand increase this forces the price level goes up which leads to inflation.Second one is as the effect of fiscal policy government spending, increases investment this leads to increases the aggregate demand and shifting money supply causes the inflation these are causes for a short run inflation.

The long run inflation happend due to the economic growth and money growth changes.Long run inflation means money growth is higher than the economic growth. That means change is money supply is greater than the aggregate demand or real output that is called long run inflation. If money growth is lower than the economic growth called deflation.