Wetland and Driland are two countries with substantial trade and capital flows. Current exchange rates: 1 Wet = 3Dri. Current interest rates: Wet Interest rates 8% Dri Interest rates 8% Current...

Extracted text: Wetland and Driland are two countries with substantial trade and capital flows. Current exchange rates: 1 Wet = 3Dri. Current interest rates: Wet Interest rates 8% Dri Interest rates 8% Current inflation rates: Wet Inflation =3% Dri Inflation = 3% a) If income level in Wetland increases substantially while income level in Driland remains unchanged what would happen to Dri's exchange rate:Would the exchange rate change towards 1 Wet = 4 Dri or towards 1 Wet 2 Dri? Justify your answer suitable arguments If inflation rate in Driland increased to 5% while inflation rate in Wetland remains at 3%, would the current exchange rate (1 Wet b) = 3 Dri) change and if so in which direction. Would the exchange rate change towards 1 Wet = 4 Dri or towards 1 Wet = 2 Dri ? Justify your answer suitable arguments. Justify your answer with suitable arguments. c) If all the above changes occur at the same time, considering income, interest rates and inflation, what would happen to Dri's exchange rate ?. Would the exchange rate change towards 1 Wet = 4 Dri or towards 1 Wet = 2 Dri? Justify your answer suitable arguments. Explain