Explain why after, say Norway unilaterally pegs the krone to the ...

[lindiwe]

Explain why after, say Norway unilaterally pegs the krone to the euro, domestic money market disturbances will no longer affect domestic output despite the continuation of float-rate regime against non-euro currencies.
 
  What will be an ideal response?

Question 2

Explain 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.
 
  What will be an ideal response?

[lkoler]

Answer to Question 1

Because Norway's interest rate must equal the euro interest rate, any pure shifts in the AA curve (see chapter 19 ) will result in immediate reserve inflows or outflows that leave Norway's interest rate unchanged.

Answer to Question 2

Any independent money supply change in Norway would put pressure on krone interest rates and thus on the krone/euro exchange rate. So by pegging the krone even to a single foreign currency, Norway completely surrenders its domestic monetary control.

[lindiwe]

Correct answers!

[lkoler]

Great! Please up vote