What is seignorage? How does it work?

What is seignorage? How does it work? 

Ans. The amount of goods and services received by the government by printing new currency in a given time period is called Seignorage. In symbolic terms, Seignorage = Mt /Pt = New bills printed in period t divided by price level in period t. When government prints new currency, it is obtaining goods and services in return. Therefore, it is a kind of tax on private agents. Therefore, seignorage is also called inflation tax at times. It can be derived mathematically Seignorage = Mt /Pt = (Mt /Mt ) (Mt Pt ) Since M divided by M is equal to inflation we get, Seignorage = Pt (Mt /Pt ) It is shown with the help of figure given below: