Suppose a French bottle of champagne costs 20 euros.

(LO3)

a. If the euro–dollar exchange rate is 0.8 euro per dollar, so that a dollar can buy 0.8 euro, how much will the champagne cost in the United States?

b. If the euro–dollar exchange rate rises to 1 euro per dollar, how much will the champagne cost in the United States?

c. If an increase in the euro–dollar exchange rate leads to an increase in Americans’ dollar expenditures on French champagne, what will happen to the amount of dollars supplied to the foreign exchange market as the euro–dollar exchange rate rises?