Question

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 2021 to be around 4% while your forecast for its real GDP growth is at 1%. Suppose inflation in the UK is expected to be at 2%. Currently, Czech National bank has a floating exchange rate.

Required:
Calculate inflation in Czech Republic.

Answer 1

3%

Step-by-step explanation:

Calculate the inflation in Czech Republic

Expected Rate of money growth of Czech republic in 2021 = 4%

Forecast for real GDP growth = 1%

we will use the Monetary approach to calculate inflation in Czech

Using QTM: M+V = P+Y ( M = 4% , Y = 1% ) assume change in V = 0

P ( inflation ) = 4% - 1% = 3%