Final answer:
Attempting to raise too much seignorage revenue can cause hyperinflation, where excess money supply leads to rapid price increases and economic destabilization. Economists warn against letting inflation get out of control due to its destructive effects on the economy. If currency appreciation is expected, yields on government bonds can decrease but hyperinflation generally disrupts such expected outcomes.
Step-by-step explanation:
If the government attempts to raise more seignorage revenue than the maximum possible amount, it would likely result in hyperinflation. This occurs because as the government prints more money, the increased money supply chases the same amount, or even fewer, goods and services in the economy. As there is more money available, the value of money falls, causing prices to climb rapidly and uncontrollably. Consequently, the economy may face a collapse, as the currency loses its purchasing power and people lose trust in it as a store of value. Hence, economists emphasize the importance of preventing inflation from spiraling out of control. Seignorage is the profit made by a government by issuing currency, especially the difference between the face value of coins and their production costs. When governments print money to cover deficit spending, they can generate short-term revenue. However, excessive money printing can lead to inflationary pressures.
In contrast, if a country's currency is expected to appreciate in value, the yields on government bonds may decrease because the demand for that currency increases, which often leads to a lower requirement for higher interest rates to attract investors. However, in the case of hyperinflation, expected exchange rates and yields are disrupted by the rapid devaluation of the currency. Moreover, during inflation, state governments might find a temporary advantage as debts can be repaid with less valuable dollars, and tax revenues might temporarily increase due to the rise in nominal income levels. But this advantage is usually outweighed by the broader negative impacts of hyperinflation on the economy.