QUESTION 1 Consider the economy explained in Chapter 6, where there are 2 islands. Total population on 2 islands is 1000 people. The initial stock of fiat money is $800. Money grows in this economy at z = 1.2. The probability that a person is on Island 1 is 1/4 and on Island 2 is 3/4. Let /(p't) = 5. a. Write down the money market clearing condition for each island. You must explain the notations as a part of your answer. (2 marks) b. What is the per- person transfer the government gives to each old person? Show your steps. (2 marks) c. Compute the value of the transfer. (1 mark) d. What is the equilibrium price level at time t= 1? Show your steps. (1 mark) e. If you draw the graph of labour supply and the inflation rate in this model, how will the graph look like. Explain in 2-3 sentences, you need not draw the graph. (2 marks). f. If suppose, z= 1.1 now; calculate and explain the impact of this change on price level and labour supply in t=1 . (2+2 = 4 marks) CX