Consider the relationship between exchange-rate changes, aggregate demand, and monetary policy. a. Suppose the world price for raw materials rises, due to a growing demand for these products. On the AD/AS diagram on the right show the likely effect of this on Canadian aggregate demand, given that Canada is a net exporter of raw materials and assuming, initially, no change in the exchange rate. Use the three-point curve drawing tool to draw the new position of the AD curve. Carefully follow the instructions above, and only draw the required object. Price Level Figure 1 Real GDP AS AD ✓

Consider a country with no capital mobility and flexible exchange rates. a. Solve for the exchange rate that clears the trade balance as a function of the level of income, Y. (Assume that the trade balance is in the form T =T, + øq– mY where øis a positive constant and q = (eP*/P)). b. Solve for the level of income as a function of all exogenous variables. In what way does the multiplier differ from all other open economy multipliers computed before?

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Use the money market and FX diagrams to answer the following questions. This question considers the relationship between the Indian rupee (Rs) and the U.S. dollar ($). The exchange rate is in rupees per dollar, ERs/$. On all graphs, label the initial equilibrium point A. a. Illustrate how a permanent increase in India’s money supply affects the money and FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C. b. By plotting them on a chart with time on the horizontal axis, illustrate how each of the following variables changes over time (for India): nominal money supply MIN, price level PIN, real money supply MIN/PIN, interest rate iRs, and the exchange rate ERs/$. c. Using your previous analysis, state how each of the following variables changes in the short run (increase/decrease/no change): India’s interest rate iRs, ERs/$, expected exchange rate EeRs/$, and price level PIN. d. Using your previous analysis, state how each of the…