For each question you should assume that covered and uncovered interest parity hold along with relative PPP.

Question 3.The following Table gives information the rate of growth of the money supply and real income for the U.S and Europe over the next year.You should assume that all other determinants of the demand for money are constant.

Real income growthMoney supply growth

U.S0.050.10

Europe0.020.04

Given this information.

a.What is inflation in Europe?

b.What happens to the U.S exchange rate over the next year?

c.Suppose that the Federal Reserve wants to reduce U.S inflation to zero.By how much should it increase the money supply?

d.Suppose the Federal Reserve wants the exchange rate with Europe to be constant.By how much should the Fed increase the U.S money supply.