Since 1982, Denmark has pegged the exchange rate for the crown against first the German mark and later against the euro. In recent weeks the fixed exchange-rate regime has come under strain as the euro has fallen sharply, leading to speculation that Denmark’s currency peg to the euro will break.

a. What is Denmark’s exchange rate policy? Explain why expectations about a possible break in the link of the crown and euro might put the crown under strain.

b. To avoid a break in the link between the crown and the euro, what action must the central bank of Denmark take?