A nation's country-risk premium increases if:
a. Central bank policies become more predictable.
b. Expected inflation becomes harder to predict.
c. Its government becomes more stable.
d. All of the above.
e. None of the above
Question 2
Assume that the central bank sells government securities in the open market. 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 GDP Price Index in the context of the Three-Sector-Model? State your answer after the macroeconomic system returns to complete equilibrium.
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.
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