Answer Happy

Question 2 (25 points) "Denmark uses the krone as its currency and does not use the euro, having negotiated an opt-out from participation under the Edinburgh Agreement in 1992. (...). The Danish krone is part of the ERM-Il mechanism, so its exchange rate is tied to (...) to the euro." Source: Wikipedia. a) (10 points) According to the purchasing power parity, if the exchange rate where not fixed between the Krone and the Eurowhat would be the effect of the Danish government printing money at a faster rate than the European Central Bank? In particular, how would this affect the exchange rate between the Kron and the Euro? Justify your answer. Dr. Martin Santamaria Econ 345 International Finance b) (10 points) What happens to the real exchange rate if the nominal exchange rate can't adjust (because Denmark and the European union have agreed to a fixed exchange rate system)? c) (5 points) How do you interpret your result from b)? Does Denmark become a cheaper or more expensive place relative to the rest of Europe? Explain