Monetary authorities do not cooperate each country is

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monetary authorities do not cooperate. Each country is willing to raise up to 500 goods in taxes on their old citizens to defend the exchange rate. a. What is the real value of a dollar? Of a euro? b. Find the value of a dollar if people abandon use of the euro. Find the value of a euro if people abandon use of the dollar. c. To be free from speculative attack, a country’s commitment to defend the exchange rate must be sufficient to purchase all of its currency if it is offered for foreign exchange. Which of these two countries is most likely to be subject to a speculative attack? Page 2 of 4 See next Page
Part B (25 marks) Answer all questions of Part B in a separate examination book. Consider the following version of the Lucas model. The number of young individuals born on island i in period t , 𝑵𝑵 𝒕𝒕 𝒊𝒊 , is random according to the following specification: 𝑵𝑵 𝒕𝒕 𝒊𝒊 = (1/4)N with probability 0.5, 𝑵𝑵 𝒕𝒕 𝒊𝒊 = (3/4)N with probability 0.5, where N denotes the total number (i.e. across the two islands) of young people that are born in each period. Assume that the fiat money stock 𝑴𝑴 𝒕𝒕

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