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Consider models of Exchange rate determination. Assume interest parity holds and the return on a domestic asset is equal to the covered return on a

Consider models of Exchange rate determination.

Assume interest parity holds and the return on a domestic asset is equal to the covered return on a foreign asset. In the domestic economy the central bank decreases the interest rate in order to stimulate the economy.

Using both covered and uncovered interest parity conditions identify the direction variables would be expected to move in response to the policy changes in order to restore parity. What role do expectations play if any in this process?

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