Assume that foreign capital flows from a nation increase due to political uncertainly and increased risk. If the nation has highly mobile international capital markets and a fixed exchange rate system, what happens to the real risk-free interest rate and net nonreserve international borrowing/lending balance in the context of the Three-Sector-Model? a. The real risk-free interest rate rises and

Question

net nonreserve international borrowing/lending balance becomes more positive (or less negative).
b. The real risk-free interest rate falls and net nonreserve international borrowing/lending balance becomes more negative (or less positive).
c. The real risk-free interest rate rises and net nonreserve international borrowing/lending balance becomes more negative (or less positive).
d. The real risk-free interest rate and net nonreserve international borrowing/lending balance remain the same.
e. There is not enough information to determine what happens to these two macroeconomic variables.

Answer 1

.C