Assume that the United States trades exclusively with nations in the European Union and that the exchange rate between the U.S. and the E.U. is flexible.

a. Suppose Americans working in the textile industry decide to boycott goods made in the European Union. Explain how this boycott will affect each of the following:

1. The supply of dollars
2. The international value of the dollar

b. There is an increase in real interest rates in the United States, but not in the European Union. Using a correctly drawn and labeled foreign exchange graph, show and explain how this increase in interest rates will affect each of the following:

1. The quantity of dollars supplied in the foreign exchange market
2. The international value of the dollar