c) Explain the economics of: i) how and why the equilibrium Canadian interest rate (Rs) changes in response to the change in monetary policy adopted by the Bank of Canada; and ii) how and why that change in interest rate brings the Canadian money market (shown in the bottom panel) back into equilibrium. (5 marks) d) Suppose that in the initial equilibrium (points 1 and 1' in the diagram above) the Canadian dollar interest rate and euro interest rates are equal at 3% (R's = Re = 0.03) and the expected exchange rate equals $1.50 (Es = 1.50). The expected exchange rate then decreases to $1.47 (Es = 1.47) with no change in the euro interest rate. What is the new value of the Canadian interest rate (R's) which will keep the equilibrium exchange rate unchanged at E's? Show your method of calculation. (3 marks) e) In part d) you showed how it is possible to use a change in the dollar interest rate to maintain the actual exchange rate unchanged in the face of a decrease in the expected exchange rate. But is that always possible? Are there circumstances - for example, a larger fall in the expected exchange rate - in which that would not be possible? Explain why. (2 marks)