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 monetary base in the context of the Three-Sector-Model?
a. The real risk-free interest rate falls and monetary base falls

b. The real risk-free interest rate rises and monetary base falls.
c. The real risk-free interest rate and monetary base remain the same.
d. There is not enough information to determine what happens to these two macroeconomic variables.


.B

Economics

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