The demand for foreign bonds responds to changes in interest rates in an opposite
way vis-à-vis the demand for domestic bonds So does the response of the demand
to changes in exchange rates The demand for foreign bonds by domestic private
investors is inversely related to the domestic interest rate, since a higher interest rate in the domestic country makes domestic bonds more attractive, edging away
from holding foreign bonds The demand for foreign bonds are positively related
to the expected change in the exchange rate since an expected weaker domestic
currency means a higher return from investing in foreign bonds With regard to the
effect of wealth, a higher level of wealth raises the demand for all bonds, foreign as well as domestic. To derive the conditions for equilibrium, we proceed with the
following total differential equations for the demand for money, that for domestic
bonds and that for foreign bonds, and the total differential equation for wealth