Suppose the domestic and foreign interest rates are initially equal to 5%. Now suppose the foreign interest rate rises to 7%. Explain what effect this will have on the exchange rate. Also explain what must occur for the interest parity condition to be restored.

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The Answer of Suppose the domestic and foreign interest rates are initially equal to 5%. Now suppose the foreign interest rate rises to 7%. Explain what effect this will have on the exchange rate. Also explain what must occur for the interest parity condition to be restored.

Suppose the Domestic and Foreign Interest Rates Are Initially Equal