Consider an overlapping-generations model with inside and outside money, where the rate of return on inside money is x, while the rate of return on outside money is 1 z . There is a one-time transaction cost of φ associated with inside money, independently of the purchase size. (a) Show graphically how individuals optimally decide whether to use inside or outside money depending on the size si of their purchase. Show who uses inside money and who uses outside money. (b) What is the effect on the deposit-to-currency ratio, nominal money stock M1 and present and future GDP of an anticipated increase in z (anticipated inflation)? (c) How would your answer in part b differ if the increase in z was unanticipated (unanticipated inflation)? (d) How could this model explain positive co-movement between M1 and GDP without ever-increasing inflation?