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Foreign exchange market showing the central rate

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The Danish central bank is committed to maintaining an exchange rate of 7.46 krone per euro exchange rate with a band of 2.25% on either side of this central rate. Under current conditions in the foreign exchange market, nonofficial supply and demand would intersect at a rate of about 7.1 krone per euro. The Danish central bank has sufficient international reserves and uses official intervention to defend the fixed rate.

  • Draw a demand and supply graph of the foreign exchange market showing the central rate (7.46 krone/euro) and the positions of the nonofficial supply and demand curves.
  • As a result of the official intervention, what will be the change in Denmark's holdings of international reserves (increase, decrease, or stay the same)? In your explanation, please refer to your graph.

Reference no: EM131326688

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