9 6.1. Suppose there are two islands. The total population on the two islands is 300 people,The initial stock of fiat money is $500. The money stock increases according to M, =1.1M,-1. The probability that a person is on Island 1 is 1/4 and the probability that aperson is on Island 2 is 3/4. Let 1(p/,) =4 (so that labor supply does not depend onprice).a. Write down the money market-clearing condition for each island.b. Solve for the equilibrium price level in date 1.c. Write down the per-person transfer that the government gives to each old person.d. Compute the value of the transfer.

Fiat currency is money created by governments and not backed by valuable physical assets like gold…

6.1. Suppose there are two islands. The total population on the two islands is 500 people. The initial stock of fiat money is $500. The money stock increases according to M, = 1.1M-1. The probability that a person is on Island 1 is 1/4 and the probability that a person is on Island 2 is 3/4. Let I(p) = 4 (so that labor supply does not depend on price). a. Write down the money market-clearing condition for each island. b. Solve for the equilibrium price level in date 1. c. Write down the per-person transfer that the government gives to each old person. d. Compute the value of the transfer.

6.1. Suppose there are two islands. The total population on the two islands is 500 people. The initial stock of fiat money is $500. The money stock increases according to M, = 1.1M-1. The probability that a person is on Island 1 is 1/4 and the probability that a person is on Island 2 is 3/4. Let I(p) = 4 (so that labor supply does not depend on price). a. Write down the money market-clearing condition for each island. b. Solve for the equilibrium price level in date 1. c. Write down the per-person transfer that the government gives to each old person. d. Compute the value of the transfer.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.7P

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