Y5

1) a) Using the covered interest rate parity equivalency and logic, describe what happens to the spot exchange rate and the forward exchange rate as a result of the difference between the foreign interest rate and domestic interest rate decreasing = (ifor - idom) falling. Assume the economy is not in the long run. b) Explain how the EE curve reflects interest rate parity at all points that connect the domestic real interest rate and domestic real GDP in terms of exchange rate equilibrium