Consider an economy in which there are 1,000 workers. One-half of the workers are endowed with 50 units of the consumption good when young and nothing when old. The remaining workers are endowed with 10 units of the consumption good when young and nothing when old. Each worker saves 30 percent of their endowment when young. Let the gross real return on capital be 1.1. Let the stock of money be constant over time with M₀ = 10,000.
Assume that each worker uses 10 goods to identify themself and make a withdrawal from a bank.
a. What is the aggregate level of deposits in the economy?
b. Write down the money market-clearing condition. Compute the equilibrium price level.
c. What is the aggregate level of real money balances in the economy?
d. Compute the money multiplier.