This question follows from the analysis of Turkey and Europe in question 6. Assume that Turkey’s money growth rate is currently 15% and Turkey’s output growth rate is 9%. Europe’s money growth rate is 4% and its output growth rate is 3%. Also, assume that the world real interest rate is 1.75%. For the questions below, use the conditions associated with the general monetary model. Treat Turkey as the home country and define the exchange rate as Turkish lira per euro, E_L/€

a. Calculate the nominal interest rate in Turkey and in Europe.

b. Calculate the expected rate of depreciation in the Turkish lira relative to the euro.

c. Suppose the central bank of the Republic of Turkey increases the money growth rate from 15% to 18%. If nothing in Europe changes, what is the new inflation rate in Turkey?

d. Illustrate how the change in (c) affects the following variables: M_T, P_T real money supply, i_t , and E_L/€  over time.

e. Suppose Turkey wants to maintain a fixed exchange rate relative to the euro. What money growth rate and nominal interest rate would achieve this objective?