Monetary Policy and the Exchange RateHere we show what happens in the foreign exchange market if Genovia cuts its interest rate. Residents of Genovia have a reduced incentive to keep their funds at home, so they invest more abroad. As a result, the supply of genos shifts rightward, from S1 to S2. Meanwhile, foreigners have less incentive to put funds into Genovia, so the demand for genos shifts leftward, from D1 to D2. The geno depreciates: the equilibrium exchange rate falls from XR1 to XR2.