So this looks like a standard constrained optimization problem. You have no idea until you find out the real value of a drachma. But whether or not there is a circularity problem, it is a problem for price level determination, not money demand. In short, what people want is real money, not nominal money. In consequence, a price of money has to appear in the utility function - as it normally would not.
Agents can consume their wealth, hold it as money, or invest it in bonds.
Bonds sell for s t and pay 1 next period. Note the important assumption that money earns no interest . The second equation basically says that you can't gain in utility by swapping current consumption for money. Factors Affecting Money Demand Assume a closed economy so net supply of bonds is zero, consumption equals endowments. Assume further that all transfers are financed by printing money, so , and that transfers are proportional to pre-existing real balances, so .