The following graph shows the market for euros, which is initially in equilibrium. Suppose an economic downturn in the United States leads to a drop in American incomes, causing imports from Europe to decline. On the graph, illustrate the effect of an economic downturn on the market for euros by shifting the appropriate curve or curves. 2.00 -O 1.75 Supply Demand 1.50 1.25 Supply 1.00 EXCHANGE RATE (Dollars per euro 0.75 Flexible exchange rates 0.50 Da Fixed exchange rates 0.25 10 12 14 16 QUANTITY OF EUROS (Billions) On the graph, use the purple point (diamond symbol) to indicate the new equilibrium exchange rate and quantity under a system of flexible exchange rates. Under a system of flexible exchange rates, the dollar will appreciate . until the foreign exchange market reaches an equilibrium exchange rate of $0.75 per euro Now suppose that the United States wants to maintain the initial equilibrium exchange rate of $1 per euro. On the graph, use a grey point (star symbol) to indicate the new equilibrium under a system of fixed exchange rates. Under system of fixed exchange rates, which of the following policies could the U.S. government use to prevent the change in demand for euros from driving the exchange rate to the new equilibrium? Check all that apply. Reduce income taxes in the United States O sell U.S. euro reserves in the foreign exchange market Lower interest rates by way of monetary policy