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Question 1 {ti points}: Consider two countries, Canada {Home} and US {Foreign}. In 21113, Canada experienced relatively slow output growth {2%}, whereas US had relatively robust output growth {4.2%}. Suppose the Bank of Canada allowed the money supply to grow by 2% each year, whereas the Federal Reserve {Fed}, the US central bank, chose to maintain relatively high money growth of 111% per year. For the following questions, use the simple monetary model {where L is constant]. A. What is the ination rate in Canada? In US? What is the expected rate of depreciationfappreciation in the Canadian dollar relative to the US dollar? . Suppose the Fed increasm the money growth rate from 111% to 11%. If nothing in Canada changes, what is the new ination rate in US? . Using tiine series diagrams, illustrate how this increase in the money growth rate affects the US money supply, interest rate, prices, real money supply, and exchange rate Estes over time. {Plot each variable on the vertical axis and time on the horizontal axis.) Suppose the Fed wants to maintain an exchange rate peg with the Canadian dollar. What money growth rate would Fed have to choose to keep the value of the US dollar xed relative to the Canadian dollar? Suppose the Fed sought to implement policy that would cause the US dollar to appreciate relative to the Canadian dollar. What ranges of the money growth rate {asstnning positive values) would allow the Fed to achieve this objective? Next, consider the general monetary model, in which L is no longer assumed constant and money demand is inversely related to the nominal interest rate. In addition to the scenario described in the beginning of the question, the bank deposits in Canada pay 3% interest. Suppose the Fed increases the money giowth rate from 111% to 12% and the ination rate rises proportionately {one for one] with this increase. Using time seIies diagrams, illustrate how this increase in the money growth rate affects the US money supply, interest rate, prices, real money supply, and exchange rate Em over time. {Plot each variable on the vertical axis