The following questions focus on the exchange rate between the euro and the Dani
ID: 1208809 • Letter: T
Question
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 a recession in the euro zone causes European 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. Tool tip: Click and drag one or both of the curves. Curves will snap into position, so if you try to move the curve and it snaps back to its original position, just and drag it a little farther. The decrease in European incomes causes the Danish krone to_depreciate_appreciate relative to the euro and causes the euro to_depreciate_appreciate relative to the Danish krone. 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. Tool tip: Click and drag one or both of the curves. Curves will snap into position, so if you try to move the curve and it snaps back to its original position, just and drag it a little farther. A higher price level in the euro zone causes the euro to_appreciate_depreciate relative to the Danish krone. Suppose now that the real interest rates in the euro zone and Denmark are initially the same. Then the real interest rate in the euro zone falls, while the real interest rate in Denmark remains the same. This will cause the supply of kroner to and the demand for kroner to which causes the euro to relative to the Danish krone.Explanation / Answer
1 .The decrease in the European income causes the demand for Kroner to shift downward keeping the supply of Kroner constant.Now the grap can be drawn easily by just shifting the demand curve leftward or say downward.The reason for this downward shift is that decrease in income of Europeans will lead to fall in the demand of foreign goods.That's means that Denmark exports will decline and currency krone will depreciate.Hence the answer to first question is
The decrease in European incomes causes the Danish krone to deprciate and causes the Euro to appreciate.
2. If the price level is higher in EURO zone in comaprison to the price level in Denmark .Imports will be greater than exports in euro zone.It will lead to increase in demand of krone and simply demand for krone will go up or shift upward.
hence the answer to the second question is
A higher price level in the EURO zone causes the Euro to depreciate relative to Danish kroner.
3.The fall in the real interest rate in Euro zone is less than the interest rate in Denmark so all the investment will curb from Euro zone to Denmark.The demand for kroner will increase leading to a depreciation in Euro currency.
This will cause the supply of kroner of kroner to increase and the demand for kroner to increase ,which causes the Euro to depreciate relative to Danish kroner.
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