Interest rate parity exists and will continue to exist. The one-year interest rate in the United States and in the eurozone is 6 percent and will continue to be 6 percent. Assume that the country of Denmark's currency (called the krone) is currently pegged to the euro and will remain pegged to the euro in the future. Assume that you expect that the European central bank (ECB) to engage in central bank intervention in which it plans to use euros to sell 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.

Will the spot rate of the krone against the dollar increase, decrease, or remain the same as a result of central bank intervention?

The spot rate of the euro will....., and therefore the spot rate of the krone will .

Will the forward rate of the euro against the dollar increase, decrease, or remain the same as a result of central bank intervention?

The forward rate of the euro will.....?

Would the ECB's intervention be intended to reduce unemployment or reduce inflation in the eurozone?

The intervention is intended to reduce ..... the eurozone.

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?

It could attempt to...... its interest rate, which is the cost of borrowing.

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

The interest rate in Denmark would ......because it would remain consistent with the euro's interest rate since the krone is pegged to the euro.