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Consider an economy in which people wish to hold money balances worth a total of 5,000,000 goods. They are indifferent between money issued by the
Consider an economy in which people wish to hold money balances worth a total of 5,000,000 goods. They are indifferent between money issued by the central bank and money issued by private banks (so long as both offer the same rate of return). In the initial period, the central bank owns a stock of capital equal to its stock of money and uses the return to pay interest on its money. Assume that x = 1.2 and a dollar always buys two goods. lntermediation. including the payment of interest on money, is costless. (a) What rate of interest p must the central bank offer to induce people to accept its money? Does this satisfy the central bank's budget constraint? (b) What is the real value of the total amount of money issued by private banks? ((2) Is there an equilibrium in which a dollar always purchases three goods? In this case. what is the real value of money issued by private banks
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