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: 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. 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. 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