Return to Problem 10.5 and now assume that Smith and Jones conduct their exchanges in paper money. The total supply of such money is $60 and each individual wishes to hold a stock of money equal to ¼ of the value of transactions made per period.
a. What will the money wage rate be in this model? What will the nominal prices of X and Y be?
b. Suppose the money supply increases to $90, how will your answers to part a change? Does this economy exhibit the classical dichotomy between its real and monetary sectors?