Krone free to float against the non-euro currencies, International Economics

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Q. Illustrate why when Norway unilaterally fixes its exchange rate against the euro but leaves the krone free to float against the non-euro currencies, it is unable to keep at least some monetary independence.

Answer: Any independent money supply vary in Norway would put pressure on krone interest rates and therefore on the krone/euro exchange rate. Therefore by pegging the krone even to a single foreign currency Norway completely surrenders its domestic monetary control.

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