1. Suppose that the European Union follows a flexible exchange rate regime. The exchange rate between the euro (EUR) and the U.S. dollar (USD) is currently 1 EUR = 1.17 USD.

a. Use a graph to show the equilibrium in the foreign exchange market with the U.S.-dollar-per-euro exchange rate on the y-axis and the quantity of euros on the x-axis.

b. Suppose that due to challenges in the eurozone economic environment, the costs of producing goods in the eurozone increases sharply. What effect will this have on the exchange rate? Use a graph to explain.