Suppose you are the head of the Central Bank in Candiland. The current inflation rate is 4%. As the Central Bank, you want to achieve a target inflation rate of 2.5% within a year. Candiland has a real income growth rate of 3%. The world real interest rate is constant and 2%.

A. What is the growth rate of money supply in this economy?

B. Suppose you decided to adopt a money supply target to achieve the inflation target. What money supply growth rate will allow you to achieve your target inflation rate?

C. Suppose you instead want to use an exchange rate target relative to the U.S. dollar and the current U.S. inflation rate is 2%. How much appreciation or depreciation you need to achieve your inflation target?

D. Suppose instead you want to adopt an interest rate policy to achieve the target inflation rate. What target nominal interest rate will allow you accomplish your inflation target?