Part 1: Short Answer Questions (32 marks) Question 1 (5 marks) Using the fundamental equation of the asset approach to exchange rates for two countries, Home and Foreign, show graphically the effect on expected rate of return on Home and Foreign deposits and on the spot exchange rate if the expected.exchange rate E H/F, increases, but interest rates in both countries remain unchanged. Question 2 (4 marks) Canada's main trading partners in terms of exports are US (78.5%), China (3.8%) and UK (2.5%). Assume that the Canadian dollar has depreciated relative to the U.S. dollar, it has appreciated relative to the Chinese yuan and has appreciated relative to the UK pound. What has happened to the value of the dollar based on the effective exchange rate? Explain. Question 3(4 marks) Explain why overshooting occurs. What can the Central Bank do to mitigate its effects? Question 4 (5 marks) Assume that a nation has an output level of 250 units per year and that consumption is also 250. 1 Question 4 (5 marks) Assume that a nation has an output level of 250 units per year and that consumption is also 250. 1 >1 Suppose there is a sudden temporary drop in GDP by 18%. What does the long-run consumption path look like if this country has access to global financial markets with an interest rate of 7%? Question 5 (5 marks) A Canadian investor is considering investing in France. Use the UIP condition to explain how each of the following situation would affect the value of the euro and the Canadian dollar. a. An increase in Canadian interest rates b. A decrease in the expected future exchange rate, Ee CAD/E Question 6 (4 marks) Use the money market diagram and the IS-LM-FX model to show graphically the effects of a decrease in money demand on the output, interest rate, exchange rate, consumption, investment, and trade balance. Assume a floating exchange rate regime. Question 7 (5 marks) Using the IS-LM -FX diagram, show graphically and explain the effects of a contractionary monetary policy under a fixed exchange rate regime. What happens to output, interest rate, and the exchange rate?