Denmark keeps its currency, the krone, pegged to the euro at a fixed rate. A global crisis makes investors see Denmark as a safe haven (a safe place to invest), creating upward pressure on the krone (it would appreciate if the exchange rate were flexible). However, the Danmarks Nationalbank wants to maintain the fixed exchange rate and free capital mobility.
Which of the following policies is consistent with defending the peg under this upward pressure?

Question

Denmark keeps its currency, the krone, pegged to the euro at a fixed rate.  A global crisis makes investors see Denmark as a safe haven (a safe place to invest), creating upward pressure on the krone (it would appreciate if the exchange rate were flexible). However, the Danmarks Nationalbank wants to maintain the fixed exchange rate and free capital mobility.   
 Which of the following policies is consistent with defending the peg under this upward pressure?

Answer

Devalue the krone, announcing a weaker fixed rate against the euro.

Answer

Sell euros and buy kroner, reducing foreign exchange reserves.

Answer

Buy euros and sell kroner to accumulate foreign exchange reserves.

Answer

Raise interest rates to appreciate the krone.

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Denmark keeps its currency, the krone, pegged to the euro at a fixed rate. A gl...

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