The recent outbreak of COVID-19 has major impact on the Canadian money and financial markets. To ensure the financial markets are functioning smoothly, the Bank of Canada pumped liquidity into the system. At the same time, firms now only accept credit cards or mobile payment apps such as Goggle Pay, Apple Pay, PayPal as means of payments. Many expect this would have a long-lasting impact on the Canadian financial system.

a) "According to the asset approach to the exchange rate, there will be an overshooting of C$ against the US$. Besides, this overshooting of C$ might put an upward pressure on the cost of living in Canada." True/False/Uncertain, explain with the aid of ONE diagram for the asset approach to the exchange rate. (15 points)

b) In the context of the monetary approach to the exchange rate, what happen to the price levels in both Canada and the U.S. and the C$/US$ exchange rate? Explain. (5 points)

Note:

1) Quote the exchange rate as EC$/US$.

2) Use the subscripts "C" and "US" to represent all the variables and terms used for Canada and the U.S. respectively in your written explanation and diagram. You must use these notations; otherwise, you will receive a grade of ZERO for the whole question on the exam.