Suppose that the domestic economy has a flexible exchange rate regime and that the uncovered interest parity does not hold exactly, but that the true relationship is

4. [5 points] points] Suppose that the domestic economy has a exible exchange rate regime and that the uncovered interest parity does not hold exactly, but that the true relationship is SC 1+ip=(1+z'*), Where p is a term measuring the riskiness of domestic bonds relative to foreign bonds. Can you interpret the new uncovered interest parity condition? Using this new uncovered inter- est parity condition and the monetary model, explain the short run eects in the domestic economy of an increase in the riskiness of domestic bonds