Question

Suppose a recession in Malaysia causes Malaysian incomes to decrease, while incomes in Denmark remain the same. Shift the appropriate curve or curves on the following graph to illustrate how this affects the market for Danish kroner if all other things remain equal. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. Demand for Kroner Supply of Kroner RINGGIT PRICE OF KRONER Demand for kroner QUANTITY OF KRONER

Answer 1

CASE-1

a) In the first case when Malaysia's income level falls it would lead to a fall in demand for danish kroner thereby causing a downward shift in the demand curve in the first diagrammatic representation (Please refer to the diagram below).

When the demand for danish krone falls, the danish krone depreciates in relation to the Malaysian ringgit which by default means that Malaysian ringgit is appreciated relative to the Danish krone.

Ringgit Price of Kroner. uc gry of Kroner.

b) When the price level rises in Denmark, the demand for danish kroner will fall because Malaysians will start purchasing fewer goods and services in Denmark as their purchasing power falls with a rise in the price level.

Due to a fall in demand for goods and services, the demand for danish kroner falls to which can be shown by a leftward shift in the demand curve for danish kroner (just like when there is a recession in Malaysia) leading to depreciation of danish krone in relation to Malaysian ringgit.  

CASE-2

In the second scenario, when the real interest rate in Denmark rises while the interest rate in Malaysia remains the same, the supply of danish krone will decrease leading to an upward shift in the supply curve for danish krone (refer to the diagram below). This is because people in Denmark will then prefer to invest in their own country due to attractive interest rates. Now, Malaysians will also find it more attractive to invest in Denmark due to an increase in real interest rates while interest rates in their home country remain the same. This will cause an increase in demand for danish krone leading to a rightward shift in the demand for danish krone (refer to the diagram below). The overall impact of the interaction of demand and supply curves will show us that the danish krone appreciates in relation to the Malaysian ringgit.

S2 & Price & Klown Gry of Kroner

Answer 2

1. Graph: shift S1 to left

2. appreciate, depreciate

3. Graph: Shift D1 to right

4. increase, decrease, appreciate

   (person above is completely wrong)