Short Answer Questions, please provide your analytical or graphical answers to the following questions, do not write irrelevant words.

5. (20 points) Money Market and Exchange Rate

(1) Explain how the money markets of two countries are linked though the foreign exchange market.

(2) The following Figure shows the effect on the Dollar/Euro exchange rate and the Dollar interest rate after an increase in the U.S. money supply. Please explain why the dollar depreciates against the euro in this case