Consider two identical countries, a and b, in our standard overlapping generations model. In each country, the population of every generation is 200 and each young person wants money balances worth 50 goods. Assume that the money of country a is the only currency that currently circulates in the two countries. There are $800 of country a money split equally among the initial old of both countries.
a. Find the value of a country a dollar and the consumption of the initial old.
b. Suppose country b issues its own money, giving £10 to each of the initial old of country b. To ensure a demand for this currency, country b imposes foreignexchange controls. Find the value of a pound and the value of a dollar. Find the consumption of the initial old in country a and in country b. Who has been made better off by this policy switch?