a.Both the Federal Reserve in the United States and the European Central Bank monitor growth in the money supply over time, but use nominal interest rates to implement monetary policy. Provide an example of a situation in which these two approaches to targeting require different central bank responses. Provide an example in which these two approaches are compatible.

[Hint: prices are sticky in the short run, so expected inflation and actual inflation may differ.]

b. Consider a country that has experienced a hyperinflation. In general, countries with higher inflation rates tend to have less stability in the inflation rate, making it difficult to forecast. If this country wants to reduce its inflation rate, state which of the following monetary regimes is least likely to succeed: exchange rate target, money supply target, nominal interest rate policy.

Which approach is most likely to succeed? Explain.