Suppose there are two islands. The total population on the two islands is500 people. The initial stock of fiat money is $500. The money stockincreases according to Mt=1.1 Mt-1.

The probability that a person is onIsland 1 is 1/4 and the probability that a person is on Island 2 is 3/4. Let l(pt)=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 time = 1

c. Write down the per-person transfer that the government gives to eachold person.

d. Compute the value of the transfer.