Monetary approach to the long-run exchange rate

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Consider two small open economies, Canada and Mexico, and the exchange rate is quoted as EC$/Peso.  

1) Suppose Mexico experiences a slowdown in production technology, and many believe this technological slowdown will last for a long time.  

a) In the context of the asset approach to the exchange rate, what happens to the C$/Peso exchange rate in both short run and long run?  Explain in words and ONE foreign exchange market diagram

b) In the context of the monetary approach to the long-run exchange rate, what happens to the C$/Peso exchange rate in nominal terms? 

2) Instead of a technological slowdown in Mexico, suppose there is a temporary increase in money demand in both Canada and Mexico.

c) In the context of the asset approach to the exchange rate, what happens to the C$/Peso exchange rate in the short run?  Explain in words and ONE foreign exchange market diagram

Reference no: EM131079502

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