Exercise 1 (10 marks)

Consider two identical countries,AandB, in our standard overlapping generations model. In each country, the population of every generation is 200, and each young person wants money balances worth 40 goods. Assume that the money of countryAis the only currency that currently circulates in the two countries. There are $1000 of countryAmoney split equally among the initial old of both countries.

1. Find the value of a countryAdollar.
2. Find the consumption of the initial old.

Now, suppose countryBissues its own money, giving 12 to each of the initial old of country

B. To ensure a demand for its currency, countryBimposes foreign-exchange controls.

c. Find the value of one euro and the value of one dollar.

d. Find the consumption of the initial old in countryAand in countryB. Who has been made better off by this policy switch?