1) Assume, the initial exchange rate is $1.20Cdn for $1.00US. After 10 years, the United States price level has risen from 100 to 200, and the Canadian price level has risen from 100 to 175.

i) What nominal exchange rate would preserve the initial real exchange rate?

ii) Which country's currency depreciated?

2)The domestic demand for bicycles is given by Q = 32/0.3 - P/0.3The foreign supply is given by P = 16 and domestic supply by Q = P/0.4 - 12/0.4.

i) Compute the price and quantity in equilibrium with free trade, and again in the presence of the tariff.

ii) Show the dead-weight loss

iii) Explain costs and benefits of a tariff.