Consider the two country: Canada and German model of exchange rate determination discussed in class with short-run nominal rigidities and in which money market equilibrium holds every period, Uncovered Interest Rate Parity holds every period, and PPP holds in the long-run.

Assume that the Canadian and German economies are initially in equilibrium. Imagine that the Central bank of Canada decreases the money supply and this action is considered permanent. Assume there are no changes in the German economic variables initially

Explain what happens to Canadian and German interest rates, Canadian and German princes, and the exchange rate (measured as units of Canadian currency per one unit of German currency Es in the short, medium, and long run. Support your answer with a graph of the Canadian money market equilibrim and a graph of the foreign exchange market