Suppose that there are two economies only, local and foreign. Predict the changes in the exchange rate E, defined as local currency per foreign currency, under each of the following situation with interest parity model.

1.Local real output (Y) increases, assuming people do not adjust their expected exchange rate (short-run effect and long-run effect )

2.Local nominal money supply (M) decreases, assuming people do adjust their expected exchange rate (short-run effect and long-run effect )

3.Foreign nominal money supply (M*) increases, assuming people do adjust their expected exchange rate (short-run effect and long-run effect )