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 GDP Price Index in the context of the Three-Sector-Model?
a. The real risk-free interest rate rises and GDP Price Index rises.
b. The real risk-free interest rate falls and GDP Price Index falls.
c. The real risk-free interest rate rises and GDP Price Index falls.
d. The real risk-free interest rate and GDP Price Index remain the same.
e. There is not enough information to determine what happens to these two macroeconomic variables.
Question 2
If the price of inputs rises and consumer expectations about future economic activity worsens:
a. Aggregate demand and aggregate supply rise.
b. Aggregate demand and aggregate supply fall.
c. Neither aggregate demand nor aggregate supply change.
d. Aggregate demand rises, and aggregate supply falls.
e. None of the above.
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