Consider a standard overlapping generations economy in which Euroland is the name given to area over which the euro is the regional currency. Suppose the population of Euroland is 1,000 people born each period. Each young person wants money balances worth 50 goods. There are 2,000 euros circulating.
a. Assume there is nothing outside Euroland. Compute the value of the euro using money market-clearing condition for a single country.
b. One part of Euroland, Greece, attempts to create its own currency, called the drachma. There are 50 young Greeks born each period, each wanting to hold money balances worth 50 goods. Greece prints 100 drachmas to circulate. Suppose both the euro and drachma are each accepted across Euroland, what will the exchange rate be between the euro and the drachma?
c. Assume the exchange rate is fixed at 5 drachmas per euro. Compute the value of the euro. Compute the value of the drachma.