Question 2:

5. Suppose interest rates in the United States rise. What effect would this have on the exchange rate between the US. dollar and the euro? Use a graph to support your answer. What effect would the change in the exchange rate have on the value of the exports to and imports from Europe? Explain. a. When the government budget decit increases, all else constant, how are interest rates affected? Sketch a supply and demand graph of the market for loanable funds to support your answer. b. Under what conditions would an increase in the government budget decit NOT result in higher interest rates? Sketch the scenario in a supply and demand graph of the market for loanable funds