(Solved): 2. Suppose the Danish Krone is currently pegged to the euro. Using the IS-LM-FX model for Home (Den ...

2. Suppose the Danish Krone is currently pegged to the euro. Using the IS-LM-FX model for Home (Denmark) and Foreign (Eurozone), illustrate how each of the following scenarios affect Denmark. (6 points) a. The Eurozone raises its interest rate. b. Denmark lowers government spending to reduce output (assume price level is fixed). 3. Answer the following questions about external wealth. (12 points) a. If a country has $\$100$ million of foreign debt denominated in dollars at the beginning of year 1 , the annual interest rate on the debt is $10\%$, and the country does not make any payments on the debt, and interest is compounded annually, then at the end of year 3, what would the debt amount be in dollars? ( 2 points) The total debt is $\$100(1+.\underline{\underline{1}}{)}^{?}3$ which is $\$133.1$ million dollars. b. mome Home country's currency is the peso and currently trades at 2 pesos per dollar. Home country has external assets of $\$125$ billion, all of which are denominated in dollars. It has external liabilities of $\$300$ billion, $50\%$ of which are denominated in dollars and the remainder in pesos. What happens to net wealth (in pesos) if the peso depreciates to 3 pesos per dollar? (3 points) c anm Suppose that Argentina's dollar-denominated external assets and liabilities are $\$20$ billion and $\$90$ 0_billion, respectively, and its Argentine peso-denominated external assets and liabilities are each 50 billion pesos (P). Suppose further that Argentina fixes its exchange rate at $\mathrm{P}1=\$\mathrm{US}1$. (7 points) 1. What is the peso value of Argentina's total external wealth? (2 points) 2. What is the dollar value of Argentina's total external wealth? (2 points) 3. Suppose that Argentina changes its exchange rate to $\mathrm{P}2=\$\mathrm{US}1$. Now what is the peso value of Argentina's total external wealth? (3 points)