Consider an FX market in equilibrium. Use the uncovered interest rate parity to answer the following questions.
a) Now consider the domestic return decreases. What happens to the Spot exchange rate? Use a graph to illustrate your answer and explain verbally what happens that brings the market back to equilibrium.
b) Now consider the foreign interest rate increases. What happens to the Spot exchange rate? Use a graph to illustrate your answer and explain verbally what happens that brings the market back to equilibrium.
c) Now consider the future expected exchange rate increases. What happens to the Spot exchange rate? Use a graph to illustrate your answer and explain verbally what happens that brings the market back to equilibrium.
d) Now consider the domestic Income increases. What happens to the Spot exchange rate? Use a graph to illustrate your answer and explain verbally what happens that brings the market back to equilibrium.