A nation's market-risk premium is related directly to the:
a. Volatility of central bank policies due to unpredictable changes in major macroeconomic variables.
b. Volatility of a company's cash flows due to predictable and quantifiable changes in major macroeconomic variables.
c. Unpredictable changes in market structure, such as shifts from pure competition to oligopoly or oligopoly to monopoly.
d. A company's inability to market products in a recession or period of general disruption.
e. Volatility of a company's cash flows due to unpredictable changes in major macroeconomic variables.
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 current international transactions balance in the context of the Three-Sector-Model?
a. The real risk-free interest rate falls and current international transactions balance becomes more negative (or less positive).
b. The real risk-free interest rate rises and current international transactions balance becomes more negative (or less positive).
c. The real risk-free interest rate and current international transactions balance remain the same.
d. The real risk-free interest rate rises and current international transactions balance remains the same.
e. There is not enough information to determine what happens to these two macroeconomic variables.
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