The U.S. government has a legal monopoly on the printing of U.S. currency. For the sake of this question, suppose the government decides to relinquish its monopoly—the Department of Justice will “break up” the federal government’s monopoly on U.S. currency and replace this market structure with one where each state now will issue its own unique currency. Answer the following questions using this setup.
1. With 50 different currency suppliers, that number is large enough such that we may assume this new money market has the potential to be perfectly competitive. Would this money market be, in fact, perfectly competitive or would it take a different form? Does the elasticity of demand for money play a role? If so, what? Briefly argue which type of market structure you believe would emerge: remaining perfectly competitive or becoming some type of oligopoly or monopoly and any role that the elasticity of demand might play.
2. How would the new money market structure you described in part a) affect the value of the U.S. dollar on foreign exchange markets, ceteris paribus? To give your answer structure, begin with the initial change to the money market described in the setup and end with the market structure you argued in part a) of the question.