Answer to Question 1
b
Answer to Question 2
Income growth higher in the United States than in France: The increased U.S. income will lead to U.S. consumers buying more French goods. As a result, there will be an increase in the demand for euros causing the euro to appreciate in relation to the dollar. We could also say that the dollar will depreciate relative to the euro.
Inflation higher in France than in the United States: The higher inflation in France will cause a decrease in U.S. consumers' demand for French goods. As a result, there will be a decrease in the supply of dollars leading the dollar to appreciate relative to the euro.
A real interest rate higher in the United States than in France: The higher real interest rate in the U.S. will cause both U.S. investors and French investors to increase their investments in the U.S. The increased French investment in the U.S. will cause an increase in the demand for dollars and an appreciation of the dollar relative to the euro.
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