(3-2] Interest rates, exchange rates and macroeconomic policies (20") The home country has a floating exchange regime. Please answer the following questions. (You can either use intuitive words, or use expressions, graphs and curves when necessary. Both approaches are ne as long as your analysis is clear} a] What is interest rate parity? Why does it hold? [4'] b} How is the domestic interest rate determined in the money market? What factors influence the interest rate? {4'} c] As the next election approaches, the central bank was pressured to conduct an expansionary monetary policy to boost the economy and to increase the likelihood that the current president will be reelected. How does the central bank achieve this policy in practice? How does it affect the interest rate and the exchange rate if we assume output does not change? [4'] d] Now assume that output can indeed change. How will the output move after the expansionary monetary policy? Why? How does this change feed back into the interest rate and exchange rate? [8']