Exercise 6.1 from Modelling Monetary Economics fourth edition - Bruce champ, scott freeman....

2 Exercise 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.IM,-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