Denmark is closely aligned to the Eurozone and its currency, the krone, is closely pegged to...

 

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Denmark is closely aligned to the Eurozone and its currency, the krone, is closely pegged to the euro. Denmark's government wants to introduce an expansionary fiscal policy, consisting of increases in social welfare payments in the main. Capital flows into and out of Denmark are perfectly elastic. 1. Using the IS/LM/BP model, including relevant diagrams and equations, explain the impact of this policy on the Danish economy in the short run. 2. How would your answer change if the Danish BP curve was imperfectly inelastic? 3. How would your answer change if the Danes operated a flexible exchange rate regime under perfect capital mobility? Denmark is closely aligned to the Eurozone and its currency, the krone, is closely pegged to the euro. Denmark's government wants to introduce an expansionary fiscal policy, consisting of increases in social welfare payments in the main. Capital flows into and out of Denmark are perfectly elastic. 1. Using the IS/LM/BP model, including relevant diagrams and equations, explain the impact of this policy on the Danish economy in the short run. 2. How would your answer change if the Danish BP curve was imperfectly inelastic? 3. How would your answer change if the Danes operated a flexible exchange rate regime under perfect capital mobility?

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