France and the United States have been partners in trade and the exchange rate between the French euro and the United States dollar is determined in a flexible foreign exchange market.

(a) Assume real income increased in the United States. Draw a correctly labeled graph of the foreign exchange market for the euro, and show the effect of the increased real income in the United States on the equilibrium exchange rate for the euro.

(b) Will each of the following increase, decrease, or stay the same as a result of the increase in the United States real income?

(i) France's net exports. Explain.

(ii) Unemployment in France Explain.

(iii) France's long-run aggregate supply

(c) Assume instead household savings increased in the United States. Draw a correctly labeled graph of the loanable funds market in the United States, and show the effect of the increase in household savings on the equilibrium real interest rate.

(d) Based on the change in the equilibrium real interest rate identified in part (c), what will happen to financial capital flows to the United States?

(e) Based on your answer to part (d), what will happen to the international value of the dollar in the foreign exchange market? Explain.

(f) Based on your answer to part (e), will the Federal Reserve buy or sell euros in the foreign exchange market to stabilize the dollar/euro exchange rate? Explain.