1. Let US be the home country and European Monetary Union be the foreign country. Suppose investors revise their expectation of future dollar-euro exchange rate such that expected future exchange rate E^e_$/ increases. Assume all else is constant.

Consider the FX market and the money market diagrams we learned within the asset approach to exchange rate determination and answer the following questions accordingly. Explain when the questions ask you to explain. Do not include graphical illustrations in your submitted answer but feel free to draw them on a paper as they will help you develop your answer.

1. What happens to the equilibrium U.S. nominal interest rate i_$?
2. Explain which schedule(s) shift in the FX market and why?

c. What happens to the equilibrium E_$/ exchange rate? Why?