Q. Using a figure describing both the U.S. money market and the foreign exchange market, analyze the effects of an increase in the U.S. money supply on the dollar/euro exchange rate.

Answer: A elevate in the U.S. money supply will origins the interest rate to decrease. This must increase investment and possibly consumption of durable goods. The decrease in the interest rate will cause a movement to the left along the schedule depicting the expected euro return expressed in dollars. The result is an enhancement in E or a depreciation of the dollar.