Assume that the expectation of a recession next year causes business investments and household consumption to fall, as well as the financing to support it. If the nation has low mobility international capital markets and a fixed exchange rate system, what happens to the real risk-free interest rate and the nominal value of the domestic currency in the context of the Three-Sector-Model?
a. The real risk-free interest rate rises and nominal value of the domestic currency falls.
b. The real risk-free interest rate falls and nominal value of the domestic currency remains the same.
c. The real risk-free interest rate rises and nominal value of the domestic currency remains the same.
d. The real risk-free interest rate rises and nominal value of the domestic currency rises.
e. There is not enough information to determine what happens to these two macroeconomic variables.
.B
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