Assume that the expectation of declining housing prices cause households to reduce their demand for new houses and the financing that accompanies it. If the nation has low mobility international capital markets and a flexible exchange rate system, what happens to the real risk-free interest rate and net nonreserve-related international borrowing/lending in the context of the Three-Sector-Model?
a. The real risk-free interest rate falls, and net nonreserve-related international borrowing/lending becomes more positive (or less negative).
b. The real risk-free interest rate falls, and net nonreserve-related international borrowing/lending becomes more negative (or less positive).
c. The real risk-free interest rate rises, and net nonreserve-related international borrowing/lending becomes more negative (or less positive).
d. The real risk-free interest rate falls, and net nonreserve-related international borrowing/lending remain the same.
e. There is not enough information to determine what happens to these two macroeconomic variables.
.B
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