Comparing the examples of Denmark and the United Kingdom in relationship to the European Monetary Union, the krone is pegged to the euro, whereas the British pound is not. What can be predicted then about their interest rates?
A) The United Kingdom has the ability to set its own interest rates and pursue an independent monetary policy, whereas Denmark's rates are virtually the same as those of the euro.
B) Denmark gets the benefits of having fixed exchange rates as well as having an independent monetary policy and the ability to set its own rates of interest.
C) Denmark's price level in the long run will be much higher than the Eurozone because it has to keep exchange rates fixed.
D) The United Kingdom will discover that it cannot lower its own interest rates after all, or the pound will depreciate so far that no investors will make investments in the United Kingdom.

Question

Quizplus · Accepted Answer

Since Denmark has pegged its currency, the krone, to the euro, it cannot pursue an independent monetary policy and must have virtually the same interest rates as those in the eurozone. On the other hand, the United Kingdom has the freedom to set its own interest rates and pursue an independent monetary policy since it has not joined the European Monetary Union and has not pegged its currency, the pound, to the euro. Therefore, option A is the best choice.

Comparing the Examples of Denmark and the United Kingdom in Relationship