a) (15 points) Use the Foreign Exchange Market model to check if the following statement is true, false or uncertain:"All else equal, an increase in the interest rate paid on foreign deposits causes a depreciation of the domestic currency relative to the foreign currency".

Use graph of the Foreign Exchange Market and the U.I.P. equation to support your answer. Explain the economic intuition.

b) (20 points) Check if the following statement is true, false or uncertain: "All else equal, if there is a decrease in the U.S. interest rate and at the same time an increase in the expected future level of the US dollar/Canadian dollar exchange rate (an increase in EeUSD/CAD), then the spot U.S. dollar/CAD exchange rate will increase."

Use the foreign exchange diagram to answer this question. Do not forget to explain why the variables in the model change. In addition to the graph, use the U.I.P equation to answer this question. Explain the economic intuition.