$(10$ pts$)$ Use a graph to show what happens to the demand for and the supply of U$.$S$.$ dollars

in the foreign exchange market when domestic interest rates rise relative to foreign interest

rates.

$(10$ pts$)$ Explain the process of sterilization by a central bank.

E$\text{'}$P

$(10$ pts$)$ The real exchange rate is defined as $e-p_{{?}^{?}}(**)$; where $E=$exchange rate $($foreign

currency $/$domestic currency$),P=$ domestic general price level and $P**=$ foreign price level.

From the equation above, show that relative PPP can be expressed as $-{?}_E^{\frac{?}{JE}}=I{I}^{**}-I{T}^{**}$; where

IT$*$ and IT foreign and domestic inflation rates, respectively $(5pts)$ Does the empirical

evidence suggest that purchasing power parity holds?

$(10$ pts$)$ Explain the following equation in detail: $CA+KA+$ORT$=O?($the $CA=$ current

account ; $KA=$ capital account; ORT$=$ official reserve transactions$)$ How is it relevant to a

multinational corporation?