Consider the economy explained in Chapter 6, where there are 2 islands. Total population on 2 islands is 500 people. The initial stock of fiat money is $500. Money grows in this economy at z = 1.1. The probability that a person is on Island 1 is and on Island 2 is . Let l(pⁱ_t) = 4.

a.Write down the money market clearing condition for each island.

b.What is the per- person transfer the government gives to each old person?

c.What is the equilibrium price level?

1)

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