Canada and Mexico has a strong economic and trade relationship with a free trade agreement between the two countries. Assume that there is a system of flexible exchange rates in both Mexico and Canada Indicate whether each of the following would change a demand for or a supply of Mexican peso and how that change would affect exchange rate for Mexican peso. (8 points) Changes in Change in demand Peso appreciate or or supply of peso depreciate (a) Mexico encounters severe inflation. (b) Canada engages in a high- interest-rate monetary policy. (c) Mexican productivity increases. (d) The Canadian economy moves into a severe recession.Use the accompanying figure to answer the follow questions. a. Assume that the economy initially is operating at price level 120 and real output level $900. This output level is the economy's potential (or full-employment) level of output. Suppose that the price level rises from 120 to 140 due to increase in AD. By how much will real output increase in the short run? In the long-run? (4 points) b Instead, assume that the economy initially is operating at price level 160 and real output level $900. Also assume that this output level is the economy's potential (or full-employment) level of output. Now assume that the price level dropped from 160 to 140 due to decline in AD. Assuming flexible product and resource prices, by how much will real output fall in the short run? In the long run? (4 points) C. What is the long-run level of output at each of the three price levels shown? (2 points) AS, AS. 16 140 Price Level 120 AD -AD, 870 900 930 Real Gross Domestic Product