Question: Consider the following foreign exchange market: DFX: e = edo - edQx + ed (r-r) + edzY SFX : e = eso + e81FX

Consider the following foreign exchange market: DFX: e = edo - edQx

Consider the following foreign exchange market: DFX: e = edo - edQx + ed (r-r) + edzY SFX : e = eso + e81FX Consider only the FX market, and not the impacts upon the rest of the economy. Suppose the responsiveness of foreign currency demand to changes in foreign interest rates increases. How does this affect the equilibrium exchange rate and foreign currency holdings (e*,Q)? Assume all parameters are positive, and r, rf, Y> 0 with r

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