The following table shows the inflation rates in the U.S. and

European countries (Britain, France, Germany, Italy, United States) at the end of 1960s and the early 1970s.

a.

Discuss the trend in the inflation rates between the U.S. and European countries during

this period.

b.

Explain why, with the

exception of the U.S., monetary policies

were

ineffective

under the

Bretton

-

Woods fixed exchange rate

system

. (Hint: you should use the DD

-

AA diagram

for this question).

c.

Explain the observed

relation between the inflation rates

in

the U.S. and European

countries. Use the diagram of internal balance and external balance to support your

arguments