People in an economy want to hold money balances worth 500 goods. If both central bank, or fiat, money and deposits at a bank pay the same return, people are indifferent between it and bank deposits. The central bank owns a stock of capital equal to the stock of fiat money. Assume the gross real return on physical capital is 1.10. The value of fiat money is two goods per dollar.
a. Suppose the central bank uses the net return to pay interest on money. What is the net return on money?
b. Suppose the central bank uses the net return to pay interest on money. What is the aggregate value of fiat money in this economy?