1. Assume that the real interest rates in both Canada and India have been 5 percent. Now the real interest rate in India increases to 8 percent. a. Using a correctly labeled graph of the foreign exchange market for the Canadian dollar, show the effect of the higher real interest rate in India on each of the following. i. Supply of the Canadian dollar. Explain. II. The value of the Canadian dollar, assuming flexible exchange rates. b. Using a correctly labeled graph of the loanable funds market in Canada, show how the increase in the real interest rate in India affects the real interest rate in Canada.

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