Suppose there are two islands. The total population on the two islands is 500 people. The initial stock of fiat money is $500. The money stock increases according to Mt = 1.1M(t-1). The probability that a person is on Island 1 is 1/4 and the probability that a person is on Island 2 is 3/4. Let l(p^i t) = 4 (so that labor supply does not depend on price).

a. Write down the money market-clearing condition for each island

b. Solve for the equilibrium price level in date 1.

c. Write down the per-person transfer that the government gives to each old person.

d. Compute the value of the transfe

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