Consider a commodity money economy like the one described in class but with

the following features: There are 100 identical people in every generation. Each

person is endowed with 10 units of the consumption good when young and

nothing when old. Assume that each young person wishes to acquire money

balances worth half of his endowment, regardless of the rate of return. The

initial old own a total of 100 units of gold. Assume that people are indifferent

between consuming I unit of gold or 2 units of the consumption good.

1. Suppose the initial old choose to sell their gold for consumption goods

rather than consume the gold. Write an equation that represents the

equality of supply and demand of gold ( market clearing condition for gold).

Use it to find the number of units of gold purchased by each person, my,

and the value of gold of.

2. At this value of gold, will the initial old actually choose to consume any

of their gold?

3. Would the initial old choose to consume any of their gold if the total initial

stock of gold were 800? In this case, what would be the value of gold and

the stock of gold after the initial old consumed some of their gold?