Consider an economy in which each person is endowed with 1,000 goods when young and nothing when old. When young, each person wants to consume 600 goods. The central bank pays interest on reserves equal to the net return on its capital holdings.
a. If each person divides savings between fiat money and bank deposits, use the budget constraint when young to compute the holdings of real fiat money balances.
b. Use the answer derived from part a and the fact that each young person holds $100 to compute the value of fiat money.
c. If x = 1.25, compute old-age consumption by each person in this economy.