how to set up wp in folder within static website?

It sounds like you need to copy the file /blog/index.php to /index.php and modify a line in the new copy you create:

require('./wp-blog-header.php');

to 

require('./wordpress/wp-blog-header.php');

Here is a complete guide to moving WordPress into a separate folder: http://codex.wordpress.org/Giving_WordPress_Its_Own_Directory

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