Consider two identical countries in a standard overlapping generations model. In each country, the population of every generation is 100 and each young person wants money balances worth 18 goods. Each member of the initial old starts wit $3 of country a money and 3 of country b money, regardless of citizenship. The exchange rate is fixed at 2: $1 is worth 2. There are no foreign currency controls.

a. Find the value (measured in goods) of a unit of each countrys money in a stationary equilibrium with unchanging money stocks.

What is the consumption of each old person? (Remember that each old person owns currency from both countrys)

b. Suppose each member of the initial old of both countries decides to cut his real balances of country a money by one-third (to 8 goods). He turns in $1 to the monetary authority of country b has agreed to cooperate by printing as much of its currency as is demanded. What will the total nominal stock of each countrys money be? What will the value of a unit of each countrys money be?