Exchange Rate DD Real GNP Y0 Consider the accompanying graphic. The path of adjustment, from point A to the equilibrium point, can be described as: D the exchange rate rst adjusts to its shortvrun equilibrium value, and then incomeloutput falls to its shortan equilibrium value all the while the asset market is in equilibrium and interest parity is maintained. D the retum on foreign assets (in domestic currency terms) will fall until interest parity is achieved; domestic interest rates will then rise as domestic incomelcutput falls until we arrive at the equilibrium point. D the return on foreign assets (in domestic currency terms) will rise until interest parity is achieved: domestic interest rates will then fall as domestic incomeloutput falls until we arrive at the equilibrium point. D the return on foreign assets (in domestic currency terms) will fall until interest parity is achieved: domestic interest rates will then fall as domestic inoomeioutput falls until we arrive at the equilibrium point