Assume that foreign capital flows into a nation rise due to expected increases in stock market appreciation. 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 falls
and 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.
.A
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