Exchange Rate DD Point A Eo AA Real GNP Yo Consider the accompanying graphic. The path of adjustment, from point A to the equilibrium point, can be described as: O the return on foreign assets (in domestic currency terms) will fall until interest parity is achieved; domestic interest rates will then fall as domestic income/output falls until we arrive at the equilibrium point. O the exchange rate first adjusts to its short-run equilibrium value, and then income/output falls to its short-run equilibrium value all the while the asset market is in equilibrium and interest parity is maintained. O the return on foreign assets (in domestic currency terms) will rise until interest parity is achieved; domestic interest rates will then rise as domestic income/output falls until we arrive at the equilibrium point. O the return on foreign assets (in domestic currency terms) will fall until interest parity is achieved; domestic interest rates will then rise as domestic income/output falls until we arrive at the equilibrium point. the return on foreign assets (in domestic currency terms) will rise until interest parity is achieved; domestic interest rates will then fall as domestic income/output falls until we arrive at the equilibrium point