Suppose that in Canada and the U.S., the real rate of interest is 2%. The nominal interestrate in the U.S. is 4%.In Canada, the money supply has increased by 4% per year, andoutputisgrowingby1%peryear.Assume thatpurchasing-power-parity holds.

1. Whatcanyousayabouttheexpectedinflation differentialbetweenCanada and the U.S. (ECan - EUS) ?
2. What willhappentotheexpected changeintheexchangeratebetweentheCanadiandollar andtheU.S.dollar?
3. Suppose your U.S. friend borrows from a U.S. bank at 4% and deposits the moneyin a Canadian bank at 5%.Will your U.S..friend make money, lose money, orbreakeven.