Question 1 (25 points) Canada is a small open economy and adopts a flexible rate, and its balance of payments is in balanced initially. In this question, the exchange rate is quoted as the number of US$ per C$. Recently, Shaun Osborne, strategists at Scotiabank, the Canadian dollar has recently suffered from a steep deterioration in risk sentiment in markets amid recession fears in the U.S and the unpredictability over the U.S. Federal Reserve future path on monetary policy. I a) According to Mr. Osborne, what happens to the US$/C$ exchange rate and Canada's BOP when the economy reaches its new equilibrium? Explain with the aid of the foreign exchange market diagram for C$ and be sure to discuss the adjustment in the BOP (i.e., what happens to different components of the BOP). (15 points) b) Now, suppose the Bank of Canada (BOC) finds the change in the US$/C$ exchange rate in part (a) undesirable and to wants to keep it from changing, what should it do? What happens to the stock of official reserves in Canada? What happens to the balance of payments after the intervention by the BOC? Explain. (10 points) Note: DO NOT draw a new diagram and use the one in part (a) to support your