3. Monetary Model

Assume Hungary's money growth rate is currently 12% and output growth is 8%. Europe's money growth rate is 4% and its output growth is 2%. Also, assume the world real interest rate is 2%. For the questions below, use the conditions associated with the simple monetary model (L = constant). Treat Hungary as the home country and define the exchange rate as Hungarian forint (Ft) per euro, EFt/.

a. Compute the inflation rate in Hungary.

b. Compute the inflation rate in Europe.

c. Compute the expected rate of depreciation of the forint versus the euro.