3. Suppose that Bank of Canada decreases money supply permanently in the Canadian do- mestic money market. Consider the effects this might have on the value of the Canadian dollar relative to the U.S dollar in the foreign exchange market. Assume that prices are fixed in the the output is exogenous, uncovered interest rate parity holds, and there is no change in the conditions of the U.S money market. (Total 30 points) short run, A. Use diagrams, explain what happens in the Canadian domestic money market and foreign exchange market in the short run. (Label all curves and show with arrows in the graph how curves shift). Explain what direction and why the following Canadian variables move in the short run: the nominal exchange rate (Canadian dollar per U.S. dollar), the nominal Canadian interest rate, and the real exchange rate (Canadian goods per U.S. good). B. Now analyze the long-run effects of the decrease in money supply. Again show a graph as above, and explain what happens to the following variables: nominal exchange rate, nominal interest rate, real exchange rate