A nation's country-risk premium can be divided into two major parts:
a. Market risk premium and foreign exchange risk premium.
b. Market risk premium and credit risk premium.
c. Market risk and expected inflation premium
d. Market risk premium and political/social risk premium.
Question 2
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 real GDP in the context of the Three-Sector-Model?
a. The real risk-free interest rate rises and real GDP falls.
b. The real risk-free interest rate falls and real GDP rises.
c. The real risk-free interest rate rises and real GDP remains the same.
d. The real risk-free interest rate and real GDP remain the same.
e. There is not enough information to determine what happens to these two macroeconomic variables.
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