1. Suppose the foreign money growth rate rises. Expectations are adap- tive. (6) a. Using Fisher's condition compare the short and long run effects on the depreciation rate of the domestic currency. (6) b. Use UIRP to compare the short and long run effects on the domestic interest rate for the shock in (a). a. Short and Long Run Effects on Depreciation Rate of Domestic Currency using Fisher's Condition: According to Fisher's equation, the nominal interest rate (i) can be decomposed into the real interest rate (r) and the expected inflation rate (me): 1=1r+ T, In the short run, when the foreign money growth rate rises, it leads to higher inflation expectations in the foreign country. This increase in inflation expectations causes investors to demand a higher nominal interest rate on foreign assets, leading to a depreciation of the domestic currency in the short run. b. Short and Long Run Effects on Domestic Interest Rate using Uncovered Interest Rate Parity (UIRP): UIRP states that the difference in interest rates between two countries should equal the expected change in the exchange rate between their currencies. Mathematically, UIRP can be represented as: iqg i = Expected change in exchange rate where 7,4 is the domestic interest rate, if is the foreign interest rate, and the expected change in exchange rate reflects the expected depreciation of the domestic currency relative to the foreign currency. In the short run, when the foreign money growth rate rises, it leads to higher inflation expectations and thus higher nominal interest rates in the foreign country. This would cause the foreign interest rate (2 #) toincrease. According to UIRP, if the domestic interest rate (27) remains unchanged, it would lead to an expected depreciation of the domestic currency in the short run