Comparing the Examples of Denmark and the United Kingdom in Relationship

question 13

Multiple Choice

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.

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Definitions:

Expected Returns

The average return an investor anticipates on an investment, based on historical data, projected performance, and market analysis.

Factor Portfolio

A well-diversified portfolio constructed to have a beta of 1.0 on one factor and a beta of 0 on any other factor.

Well-Diversified Portfolio

A portfolio that contains a wide variety of investments across multiple asset classes to reduce risk.

Variance of Returns

A statistical measure that captures the dispersion or spread of an asset's returns around its mean or average return.