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