Consider two economies, Denmark and the Eurozone. Suppose that the Eurozone has an output growth of 2%, and the European Central Bank (ECB) maintains a money supply growth of 3%. Denmark, on the other hand, has a high output growth rate of 5%, and its Central Bank maintains an exchange rate peg with the euro. For the following questions, use the simple monetary model (where L is constant).

Consider two economies. Denmark and the Eurozone. Suppose that the Eurozone has an out- put growth of 2%1 and the European Central Bank (ECB) maintains a money supply growth of 3%. Denmark. on the other hand. has a high output growth rate of 5%. and its Central Bank maintains an exchange rate peg with the euro. For the following questions1 use the simple monetary model [where L is constant]. {a} What is the ination rate in the Eurozone'? (4 points} {h} Find the money supply growth rate that the Central Bank of Denmark needs to adopt, to keep the 1.ralue of the krone xed relative to the euro. {4 points) As a consequence of the COVlD pandemic1 the ECB has opted to run a loose monetary policy. and has decided to permanently increase the money growth rate from 3% to 15%. As a consultant of the Danish Central Bank, you are required to make an assessment of the implications of this decision on Denmark's economy. Assume that the output growth rates in both economies did not change. {c} Find the new money supply growth rate that the Central Bank of Denmark needs to adopt, to maintain the peg with the euro. (4 points} {d} Using time series diagrams (where time is on the horizontal axis}, illustrate how the permanent increase in the ECB's money growth rate. affects Denmark. Specically focus on the effect on the money supply MD. Denmark's price level PD. real money supply Mofpo and the exchange rate krone-euro Ekrj'- Denote period T. as the period when the ECB increased its money growth rate. do not forget to compute arid include in your plots the growth rates of each of the variables before and after period T. {8 points) {e} Concerned about the inflation. suppose that policymakers in Denmark decide to aban- don the peg with the euro. To counteract the ECB's monetary policy [assume the money growth rate in the Eurozone is 6%]. Denmark's Central Bank has decided to set a money growth rate of TE. 'With this information. compute the new ination rate in Denmark. Will the kron appreciate or depreciate with respect to the euro? Please compute the rate of change in the exchange rate kron-euro. (5 points}