Use the money market and foreign exchange diagrams to answer the following questions about the relationship between the Canadian Dollar and the U.S. dollar ($). The exchange rate is in Canadian dollars per US dollar (eCAD/US). We want to consider how a change in the U.S. money supply affects interest rates and exchange rates. On all graphs, label the initial equilibrium point A.

a). Illustrate how a temporary increase in the U.S. (foreign) money supply affects the money and foreign exchange markets. Label your short-run equilibrium point B and your long-run equilibrium point C. Use a graph of the money market and a graph of the foreign exchange market to support your answer. (Also explain the change)

b). Using your diagram from part (a), state how each of the following variables changes in the short-run (increase/decrease/no change): U.S. interest rate, Canadian interest rate, (eCAD/US), (eCAD/US) e , and the price levels. Do not forget to explain why the variables change.

c). Using your diagram from part (a), state how each of the following variables changes in the long-run (increase/decrease/no change):U.S. interest rate, Canadian interest rate, (eCAD/US), (eCAD/US) e , and the price levels.