Denmark pegs their currency, the krone, to the euro. (10 points) Draw two diagrams, side by side wit

Denmark pegs their currency, the krone, to the euro. (10 points) Draw two diagrams, side by side with the moneymarket diagram for Denmark on the left and the expected return inkrone / exchange rate diagram on the right hand side. Label theinitial equilibrium point A. Denmark suffers from an adverseproductivity shock and goes in a recession. Show how your twodiagrams are affected by the recession in Denmark. Assume that thepeg is credible. b) (10 points) Suppose Denmark prefers to fight the recessionvia counter-cyclical monetary policy by increasing the money supplyin hopes of lowering interest rates in Denmark. Explain what wouldhappen…i.e., would they be successful or not? Be sure to mentioncapital flows and use the term(s) ‘capital flight’ and/or ‘hotmoney,’ whichever applies. Make sure to use a balance sheet – T -account for Denmark’s central bank and show/explain how the moneysupply changes endogenously. (Note: this is all the information that is provided). I don’tthink the answer has to be exact, it just has to provide a generalperspective answers and the correct macro-information. . . .

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