In class we argued that changes in inflation expectations can have effects on nominal exchange rates. a) Graphically, show the effect of a reduction in expected inflation using the foreign exchange market and money market of a country together. What happens to the nominal exchange rate? b) Inflation expectations can be influenced by actual inflation rates. To keep inflation expectations stable, countries may pursue a policy of inflation targeting that aims to keep inflation rates stable. Below is a table of some inflation targeting countries and the years in which they adopted the practice: Country Year of adoption New Zealand 1990 Chile 1991 Canada 1991 Israel 1991 Sweden 1993 Finland 1993 Australia 1994 Brazil 1999 Mexico 1999 South Africa 2000 Indonesia 2005 1 Go to the International Monetary Fund's most recent World Economic Outlook database (accessible directly or through www.imf.org) and collect the annual inflation rate series PCPIEPCH ("Inflation, end of period consumer prices, percent change") for 4 of these countries, starting in 1980 (you may choose any 4). Then graph the data for each country using Excel or some other data analysis package. Just looking at the data, does inflation appear to behave differently after the adoption of inflation targeting?