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Consider a standard OLG model applied to the Eurozone where euro is onlyregional currency. Suppose the population of Eurozone is 1,000 people in each generationfor each period. Each young person wants money balances worth 50 goods. There are2,000 euros circulating.
(a) Find the value of a euro and the consumption of the initial old.
(b) Suppose following the "Brexit", Germany decides to quit the Eurozone and issuesits own currency. The population of Germany is 50 in each generation. Eachyoung German wants money balances worth 50 goods. Germany issues 100 marksto circulate. If both the euro and mark are each accepted across Eurozone andGermany, what will the exchange rate be? If the value of a euro does not change,can we guarantee that the German mark will circulate without foreign exchangecontrols.
(c) Suppose Germany and the rest of Eurozone imposes foreign exchange controls.Assume the German central bank gives 100 marks to and distributes evenly amonginitial old. Find the value of a euro and the value of a mark. Find the consumptionof the initial old in the Eurozone and in Germany. Who has been made betteroff or worse off due to "Dexit", i.e., German leaving Eurozone? (Hint: rememberwhen the Dexit happens, each initial old still holds the same amount of euros asbefore.)
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