Reference no: EM133177096

Question - Interest rate parity exists and will continue to exist. The one-year interest rate in the U.S. and in the eurozone is 6% and will continue to be 6%. Assume that Denmark's currency (called the krone) is presently pegged to the euro and will remain pegged to the euro in the future. You expect that the European central bank (ECB) to engage in central bank intervention by using euros to purchase a substantial amount of U.S. dollars in the foreign exchange market over the next month. Assume that this direct intervention is expected to be successful at influencing the exchange rate.

1. Will the spot rate of the krone against the dollar increase, decrease, or remain the same as a result of ECB intervention?

2. Will the forward rate of the euro against the dollar increase, decrease, or remain the same as a result of ECB intervention?

3. Is the ECB's intervention intended to reduce unemployment or reduce inflation in the Eurozone?

4. If the ECB decided to use indirect intervention instead of direct intervention to achieve its objective of influencing the exchange rate, would it increase or reduce the interest rate in the Eurozone?

5. Based on your answer to part (d), will the interest rate of Denmark increase, decrease, or remain the same as a result of the ECB's indirect intervention?