In the late 1970s much of the world suffered from stagflation, a combination of high inflation and high unemployment. Many countries, such as France, chose to increase their money supplies in an effort to stimulate growth and reduce unemployment. Others, such as the United States, chose to reduce their money supplies in an effort to tackle inflation.

With the U.S. as the home country, illustrate the choices made by France and the U.S. on a single forex/money-market graph based on the one presented in KOM Ch. 15 where both prices and expectations are fixed. [The French currency at this time was the franc (FF).]

a. Explain in words what you are showing with your graph.

b. According to your graph, what happened to the value of the dollar vis-à-vis the French franc in the early 1980s?

c. Did the French and American policies push the $/FF exchange rate in the same direction or in different directions?