Assume that foreign capital flows from a nation increase due to political uncertainly and increased risk. If the nation has highly mobile international capital markets and a fixed exchange rate system, what happens to the GDP Price Index and current international transactions balance in the context of the Three-Sector-Model?
a. The GDP Price Index falls and current international transactions
balance becomes more positive (or less negative).
b. The GDP Price Index rises and current international transactions balance becomes more negative (or less positive).
c. The GDP Price Index and current international transactions balance remain the same.
d. The GDP Price Index rises and current international transactions balance remains the same.
e. There is not enough information to determine what happens to these two macroeconomic variables.
.A
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What are the four main ways in which the CPI is an upward-biased measure of the price level?
What will be an ideal response?