Question 2: Consider the following supply-demand framework for the USD/

1. Given that the European nations have flexible exchange rates, can you discuss two examples of real-world factors that could cause the demand for euro to move from D to D1? By what percent has the euro gone up or down against the USD (must show your workings)?
2. Suppose over the last five years the volatility of $/ increased rapidly. What is likely to happen to its ($/) bid-ask spread? In an environment of such extreme volatility, the central bank of a country(e.g., the USs Federal Reserve System) can take measures to intervene in the foreign exchange market. What does the central bank usually do if the value of domestic currency is very high or very low?