Question A$2.$ Suppose that the rate of return on domestic assets $($US dollars$),i_{\text{\$}},$ is $3$ percent,

and the direct rate of return on foreign assets $($euros$),ilon,$ is $2$ percent. Today's spot dollar$-$euro

exchange rate, $E_{\frac{\text{\$}}{}\text{l}\text{o}\text{n}},$ is $1\mathrm{.}06.$ If the future dollar$-$euro exchange rate, $E_{\frac{\text{\$}}{}\text{l}\text{o}\text{n}}^e,$ is expected to be $1\mathrm{.}116,$

at what rate is the euro expected to appreciate or depreciate? Assuming that the initial position of

the market is at point $A$ in the graph below, explain the transition from $A$ to $B$ and calculate the

equilibrium spot exchange rate at $B.$