1. Assume that all countries are under the floating exchange rate system, and the Federal Reserve (Fed) is raising the interest rate to lower the inflation rate in the U.S.

(1) How will the higher interest rate impact the capital inflow and capital outflow of the U.S., and thus the demand and supply of U.S. dollar in the foreign exchange market? Explain your answer. (2 points)

(2) Will these changes in the supply and demand of U.S. dollar in the foreign exchange market lead to the appreciation of the U.S. dollar or the depreciation of the U.S. dollar? Explain your answer. (1 point)

2. Consider the statement: "A firm should increase the output or lower the price to increase sale when the firm makes a positive economic profit." Do you agree or disagree? Explain your answer (1 point).