1. Let US be the home country and Canada be the foreign country. Suppose that Canada experiences a temporary decline in their real GDP. Assume all else is constant.

Consider the FX market and the money market diagrams we learned within the asset approach to exchange rate determination and answer the following questions accordingly. Explain when the questions ask you to explain. Do not include graphical illustrations in your submitted answer but feel free to draw them on a paper as they will help you develop your answer.

1. What happens in Canada money market following the policy change? Explain any changes in the graph.
2. What happens in the FX market following the policy change? Explain any changes in the graph.
3. How does the equilibrium spot exchange rate E_$/CD change? Why?