Problem 2: The prisoner-ofwar camp described by Radford (1945, \"The Economic Organization of a POW. camp\

Problem 2: The prisoner-of-war camp described by Radford (1945, "The Economic Organization of a P.O.W. camp" , Economica)t periodically received large shipments of cigarettes from the Red Cross or other sources. a) How did cigarette shipments affect the equilibrium price level (the price of goods in terms of cigarettes) in the P.O.W. camp? Explain and illustrate your answer in a diagram with the real interest rate on the vertical axis and p on the horizontal axis, where C is the nominal amount of cigarettes, P is the price level in the P.O.W. camp and p is the real amount of cigarettes. Here, L(Y, r + T e ) would express the real demand for cigarettes that depends on real income, Y, the return on nonmonetary assets, r (you can assume zero for such an environment), and expected inflation. b) On some occasions the prisoners knew in advance when the cigarette shipments were to arrive. What happened to the demand for cigarette money and the price level in the camp in the days just before an anticipated shipment? Explain and illustrate your answer in a diagram with the real interest rate on the vertical axis and p on the horizontal axis. (Hint: Remember the factors that affect the real money demand from lecture and identify the variable of interest.)