Explain the international interest parity concept. Then explain in words what happens to the IS and LM curves and the nominal interest rate in the domestic economy, and then its impact on the exchange rate between the domestic economy and the rest of the world in the following situations. [Remember that a weaker currency means it takes more to buy the foreign currency, while the foreign currency is getting stronger when it takes fewer foreign currency units to buy the domestic currency.]
1) the domestic government increases spending,
2) the domestic central bank decreases the money supply,
3) there is increased confidence in the foreign government relative to the domestic economy. Using a similar analysis explain why the Euro has recently weakened compared to the dollar.