Initially, both Home and Foreign are in their long-run equilibrium. The annual monetary growth rates in Home and Foreign are 2% and 5% respectively. Domestic output growth rate is 4%, which is 1 percentage point higher than that of Foreign's. In addition, the velocity of money is held constant in both countries.

A new governor is appointed to the Home central bank at T0. The new governor wants to maintain price stability after T0 (i.e., no change in price level). Use the monetary approach for the case of ongoing inflation to answer the following questions:

• What monetary growth rate (% in MS) should the new governor choose at T0 if he wants to achieve price stability?
• What is the rate of change in E (% in E) after T0?
• Is domestic currency expected to appreciate or depreciate after T0? At what rate?

Explain and support your answer with the diagrams for the time paths of MS, R, P and E. (You must include numbers in your written and graphical explanations.)