Assume that the expectation of declining housing prices cause households to reduce their demand for new houses and the financing that accompanies it. If the nation has highly mobile international capital markets and a flexible exchange rate system, what happens to the real risk-free interest rate and current international transactions in the context of the Three-Sector-Model?
a. The real risk-free interest rate falls, and current international transactions become more positive (or less negative).
b. The real risk-free interest rate falls, and current international transactions become more negative (or less positive).
c. The real risk-free interest rate rises, and current international transactions remain the same.
d. The real risk-free interest rate rises, and current international transactions become more negative (or less positive).
e. There is not enough information to determine what happens to these two macroeconomic variables.
.A
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