i) Explain the difference between "spot" and "forward" exchange rates (5 points)

ii) We are interested in understanding the relationship between the Canadian and US dollars.Draw the demand for and supply of Canadian dollars in each of the following cases. (Your vertical axis should show the price of Canadian dollars in US dollars)

Use your diagram and explain in words the effect of each of the following events in the short run. Make sure to properly label the axes. In each case, assume the two countries under consideration are important trading partners. (5 points each)

(a) There is an increase in the real interest rates in the United States relative to Canada.

(b) Investment returns in the United States decrease relative to expected returns in Canada.

(c) Inflation in Canada falls relative to the inflation rate in the United States.

(d) Canadians expect the value of the U.S. dollar to decline.