Answer question 3. Let me know the method u use

Suppose the nominal interest rate of a country (the home country) is 7%, the foreign nominal interest rate is 8% and the expected home inflation rate over the next year is 6%. Both interest rates are annual ones. Suppose also that there is expected to be a real appreciation of 2% of the home-country currency against the foreign one after a year. Assume the risk premium is zero and covered interest parity is valid. What should be the expected inflation rate over the next year for the foreign country? Show how you come up with your answer. Is this information consistent with relative purchasing power parity? Why or why not? Assume that national income, Y, is exogenously set at one fixed level (fall employment) in both the short-run and in the long-run, and that the exchange rate is floating, Assume also that prices are sticky (the price level changes slowly over time toward its long-run equilibrium). The money supply has a zero growth rate. In each part of this question, you are asked to consider a change in money supply. That change is assumed to always be unanticipated, but once the change occurs, it is publicly known. Assume that the economy is initially in a state of long-run equilibrium. To help explain your answer to questions (a) and (b) use a separate graph in each that displays simultaneous equilibrium in the domestic money market and the foreign-exchange market (uncovered interest parity). (a) Show how a temporary decrease in the money supply affects the domestic interest rate and exchange rate in the short-run. (b) Show how a permanent one-time decrease in the money supply affects the domestic interest rate and exchange rate in the short-run and in the long-run. Explain what causes any curves to shift. (c) On a graph with the exchange rate on the vertical axis and time on the horizontal axis, show the time path of the exchange rate after a permanent one-time decrease in the money supply. Your answer should be consistent with your solution for part (b). With a figure that shows simultaneous equilibrium in the domestic money market and the foreign-exchange market (uncovered interest parity), discuss how a balance of payments crisis comes about