The real risk-free interest rate is determined by:
a. Consumer and business demand.
b. Supply and demand forces in the real loanable funds market.
c. International supply and demand for domestic currency in the foreign exchange market.
d. The size of the government debt.
e. None of the above.
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 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.
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