Question

Monetary approach. You are an economist working for Czech National Bank. Consider the economy of Czech Republic and suppose relative PPP and the quantity theory of money hold. Suppose you expect the rate of money growth of Czech Republic in the 2020 to be around 4% while your forecast for its real GDP growth is at 2%. Suppose inflation in the UK is expected to be at 19 1. Use monetary approach to determine the expected inflation rate in Czech Republic for the year 2020. YOUR ANSWER: Inflation rate in Czech Republic in 2020 will be [Select) 2. By how much do you expect the British Pound to appreciate/depreciate against the Czech Koruna in the year 2020? YOUR ANSWER: British Pound will depreciate against the Czech Koruna by [Select] Now consider how the Czech economy will respond to the Czech National Bank changing their monetary policy regime. 3. Suppose Czech National Bank pegs Czech Koruna to the British Pound. Make a forecast for inflation in Czech Republic in 2020. YOUR ANSWER: Inflation in Czech Republic will be [Select] 4. Suppose Czech National Bank adopts a crawling peg, allowing Czech Koruna to depreciate against the British Pound by 2% per year. Make a forecast for Czech inflation in 2020. YOUR ANSWER: Inflation in Czech Republic will be [Select]

Answer 1

Using QTM MV=PY or % change change in M + % change in V=% change in P+ %change in Y now, % change in M=4% and in Y=2% assuming change in V=0 gives % change in P(or inflation)=4-2=2%

Hence inflation rate=2%

2.since UK inflation=1% and Czech inflation =2% by purchasing power parity UK currency will appreciate by 1-2=-1% or UK currency will depreciates by 1% Hence Pound will depreciates by 1%

3. If Czech Koruna is pegged to Pound then the inflation in the Czech will also be same as UK with 1% inflation

4.If Koruna is crawlingly pegged to Pound with 2% depreciation each year and inflation in UK is at 1% then Inflation in Czech republic will be 1-2=-1% hence inflation will be -1%