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1. Suppose that Germany (country a) and France (country b) do not have foreign currency controls in effect. The total demand for money is always 2,000 goods in Germany and 1,000 goods in France. The fiat money supplies are 100 marks in Germany and 300 francs in France.

a. Find the value of each country's money if the exchange rate e t (as defined in the text) is 3. Do the same if e t = 1. Is one exchange rate more likely than the other? Explain.

b. Suppose the exchange rate is 3 and that France triples its fiat money stock, whereas Germany prints no new money. How many goods will France gain in seigniorage? What fraction of this seigniorage comes from German citizens?

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