Country A and Country B are trading partners each with a current account balance of zero. Country A's currency is the dollar, and Country B's currency is the euro.

1. If real output in Country A increases, will it result in a current account deficit, surplus, or no change? Explain.
2. Draw a graph of the foreign exchange market for the dollar of Country A. Illustrate the effect of the increase in real output in Country A on the value of its dollar compared to the euro of Country B.
3. Now if interest rates in Country B decrease what will be the impact on the demand for the dollar of Country A? Explain.
4. Based on part (c), what will be the effect on the value of the dollar of Country A compared to the euro of Country B?