Other things being equal, foreign governments and corporations would demand less U.S. funds if their local interest rates were lower than U.S. rates. Therefore, for a given set of foreign interest rates, foreign demand for U.S. funds is inversely related to U.S. interest rates. Show this graphical in the space provided (properly label).

Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure expectations theory? Show all work for credit.