1) If Denmark wished to keep its exchange rate with the euro fixed, what monetary policy options are available to lower unemployment in the short run?
- Denmark has all the options available to it, because domestic monetary policy is conducted inside the nation and has no bearing on its international variables.
- Traders would realize that any monetary policy actions taken inside a nation would improve economic conditions without affecting international variables.
- Denmark cannot use any monetary policy that would cause its short-run exchange rate to depreciate against the euro.
- Denmark's monetary action would restore confidence and help keep its currency stable.
2) Suppose a country has decided to peg to the dollar. Explain what will need to happen if the Federal Reserve Bank engages in a temporary decrease in money supply.