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
, is random according to the following specification:
= (1/4)N with probability 0.5,
= (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