Question 4 {20 points) Consider two small open economies, Canada and Mexico. Suppose there is a permanent change in the preference of holding money in Mexico such that the Mexican money holders are becoming more sensitive to a (given) change in interest rate. The following questions ask you to evaluate the effect of this change in money demand in Mexico on the C$Mexican Peso exchange rate using different theories of exchange rate detennination. Use the subscripts \"C\" and \"M\" to represent all the variables and terms used for Canada and Mexico respectively in your written explanation. You must use these notations; otherwise, you will receive a grade of ZERO for the whole question. a) In the context of the asset approach to the exchange rate, what happens to the C$fPeso exchange rate in both short run and long run? Explain in words and foreign exchange market diagram (only the first diagram will be graded). (15 points) b) In the context of the monetary approach to the long-run exchange rate, what happens to the C$lPeso exchange rate in nominal terms? (5 points}