Suppose a version of the model economy in which the money growth rate is a random variable. Let the probability be 4/5 that zt=1 and

the probability be 1/5 that zt=2 . The realization of monetary policy (the realized value of zt ) is kept secret from the young until all purchases have

occurred - that is, people do not learn Mt until period t is over. Prices are the only thing directly observable by the young. Let l(p^i_t) ? 5+ 0.2p^i_t

a. Use Equation 6.11 to solve for the equilibrium price level on Island 1 and Island 2.

b. What does the price level tell the worker about the money supply change?

6.3. (advanced) Suppose a version of the model economy in which the money growth rate is a random variable. Let the probability be 4 / 5 that z: = 1 and the probability be 1/5 that 2:: = 2. The realization of monetary policy (the realized value of 2;) is kept secret from the young until all purchases have occurred that is, people do not learn 1Mt until period t is over. Prices are the only thing directly observable by the young. Let 5(1):) : 5 + 0.2;): . a. Use Equation 6.11 to solve for the equilibrium price level on Island 1 and Island 2. b. What does the price level tell the worker about the money supply change