Q1. Draw the graph showing the simultaneous equilibrium in the US money market and the foreign exchange market for the dollar/euro exchange rate.

1. What is the horizontal axis? What is the vertical axis for the upper part of the graph? What is the vertical axis of the lower part of the graph?
2. What is the shape of the real money demand curve and why? How is the real money demand curve affected by an increase (decrease) in US real output and why?
3. What is the shape of the real money supply curve and why? How is the real money supply curve affected by an increase (decrease) in US money supply?
4. Indicate the equilibria in the money market and the foreign exchange market on the graph.