An article in the Wall Street Journal stated:
The U.S. dollar’s more than 20% rally since 2014 has been driven largely by what analyst call “divergence.” While the Fed has been slowly tightening monetary policy amid an improving [U.S.] economy, central banks in Europe and Japan have continued to introduce stimulus as they struggle with stagnant growth and very low inflation.
a. Which economic variable is “diverging” because of differences between the monetary policy of the Fed on the one hand and the monetary policies of the central banks of Europe and Japan on the other hand?
b. Draw a graph of the demand and supply of U.S. dollars and show the effect of this “divergence” on the foreign exchange value of the dollar. Briefly explain what is happening in your graph.