1. Assume that Canada and Kenya are trading partners

a. If the real interest rate in Canada decreases, what will happen to the financial accounts for both Canada and Kenya

b. Assume instead that Canada experiences significant inflation compared to Kenya. Draw the foreign exchange market for the Canadian currency and show what happens to the demand for Canadian dollars. Be sure to identify if the Canadian dollar will appreciate or depreciate.

2. Mexico and Canada have flexible exchange rates. Suppose the real interest rate in Canada increases relative to that in Mexico

a. Using a correctly labeled graph of the foreign exchange market for the Canadian dollar, show the effect of the change in real interest rate in Canada on the international value of the Canadian dollar (expressed as Mexican pesos per Canadian dollar)

b. How will the change in the international value of the Canadian dollar that you identified in part "a" affect Canadian exports to Mexico? Explain.

3. Assume that Russia and the US are trading partners

a. Draw a model showing the foreign exchange rate for the Russian ruble compared with the US dollar

b. Draw another model showing the foreign exchange rate for the US dollar (compared to the Russian ruble)

c. Show what happens -- on both models -- if the price level in the US increases relative to the price level in Russia

d. Does the US dollar appreciate or depreciate?

e. Does the ruble appreciate or depreciate?