1. You are the central banker for a country (Turkey) that is considering the adoption of a new nominal anchor. When you take the position as chairperson, the inflation rate is 4% and your position as the central bank chairperson requires that you achieve a 2.5% inflation target within the next year. The economy's growth in real output is currently 3%. The world real interest rate is currently 1.5%. The currency used in your country is the lira. Assume prices are flexible.

a ) What is the growth rate of the money supply in this economy? If you choose to adopt a money supply target, what is the money supply growth rate that will achieve your inflation target?

b) Suppose the inflation rate in the United States is currently 2% and you adopt an exchange rate target relative to the U.S. dollar. Calculate the percent appreciation/depreciation in the lira needed for you to achieve your inflation target. Will the lira appreciate or depreciate relative to the U.S. dollar?