Question 1-3. Answer True, False or Uncertain. Briefly explain your answer.

1. In an international economy of perfectly substitutable currencies, an increase in the stock of one country's money reduces real value of all monies.

2. The negative correlation between inflation and the real interest rate can be explained by the Fisher effect.

3. The rate of return equality holds in the model of illiquidity.

4. Consider an economy of three-period-lived people in overlapping generations. Each individual is endowed with y goods when young and old and nothing when

middle-aged. The population of each generation born in period t is Nt, where Nt = nNt-1. There are no assets other than loans. Explain how private debt can be used to provide for consumption when middle-aged. Point out who lends to whom and write the condition for the equality of supply and demand for loans in period t. Write the budget constraints for the young, the middle-aged, and the old. Be sure to define any notation you introduce.