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Denmark pegs its currency, Danish Krone (DKK), to the Euro (EUR). Under such a fixed exchange-rate...

Denmark pegs its currency, Danish Krone (DKK), to the Euro (EUR).  Under such a fixed exchange-rate system, an increase in the demand for Krone would cause the EUR/DKK exchange rate to
                
increase
                
remain unchanged
                
decrease
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Answer #2

Answer: remain unchanged

Fixed exchange rate is a safeguard against demand and supply fluctuation. Therefore, if there is an increasing demand DKK, its exchange rate should not effected.

The fixed exchange rate is E, which is above the equilibrium level (Supply (S) = Demand (D)). At the equilibrium level, quantity is Q0 and the exchange rate is Ee.

Now demand increases from D to D1 by an increase in quantity to Q1. This doesn’t change the fixed exchange rate; this remains fixed as E.

answered by: anonymous
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