Question: 1. What is the interest parity condition? 2. (a) In the model presented in the manual, what determines the Domestic Rate of Return [abbreviated to

1. What is the interest parity condition?
2. (a) In the model presented in the manual, what determines the Domestic Rate of Return [abbreviated to DRR]?
(b) What are the factors that determine the Foreign Deposit Rate of Return [abbreviated to FRR]?
3. If the foreign interest rate increases, what happens to the exchange rate, E, in the asset market equilibrium graph?
4. What does the AA curve depict? Explain the derivation of the AA curve.
5. What factors cause the AA curve to shift left?

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