Question

5. Changes in the foreign-exchange market The following questions focus on the exchange rate between the euro and the Danish krone. Assume the exchange rate is flexible. The exchange rate is defined as the number of euros you must pay for one krone. Suppose an economic downturn in Denmark causes Danish incomes to decrease, while European incomes remain unchanged Shift the appropriate curve or c on the following graph to illustrate how this affects the market for Danish kroner if all other things remain urves equal. Supply of Kroner Demand for Kroner Supply of Kroner Demand for Kroner EUROS PRICE OF KRONER The decrease in Danish incomes causes the Danish krone to relative to the euro and causes the euro relative to the Danish krone to appreciate Suppose the price level in the euro zone rises by 12 % , while depreciate l in Denmark remains the same. That is, the inflation rate in the euro zone is higher than in Denmark Suppose the price level in the euro zone rises by 12 % , while the price level in Denmark remains the same. That is, the inflation rate in the euro zone is higher than in Denmark. Drag the appropriate curve or curves on the following graph to illustrate how this affects the market for Danish kroner. ? Supply of Kroner Demand for Kroner Supply of Kroner Demand for Kroner QUANTITY OF KRONER EUROS PRICE OF KRONER increase decrease est rate in Denmark falls, while the Suppose the real interest rates in the euro zone and Denmark are initially the same. Then th real interest rate in the euro zone remains the same. This will cause the supply of kroner to and the demand for kroner which causes the euro to relative to the Danish krone. to appreciate Suppose the real interest rates in the euro zo hark are initially the same. Then the real interest rate in Denmark falls, while the depreciate will cause the supply of kroner to real interest rate in the euro zo remains th and the demand for kroner ,which causes the euro to relative to the Danish krone. to

Answer 1

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