Consider an economy with ashrinking stock of money, Mt= z Mt-1with z such that 0t= N. Each young person is endowed with y units of consumption good. The old have no endowment.

(a) Find the rate of return in a monetary equilibrium and explain what this is.

(b) Show in a graph that the monetary equilibrium does not maximize the utility of all future generations.

(c) Explain why you answered the monetary equilibrium does not maximize the utility of all future generations. Which decisions are distorted?