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 real GDP in the context of the Three-Sector-Model?
a. The real risk-free interest rate falls, and real GDP rises.
b. The real risk-free interest rate and real GDP remain the same.
c. The real risk-free interest rate rises, and real GDP falls.
d. The real risk-free interest rate falls, and real GDP remains the same.
e. The real risk-free interest rate falls, and real GDP falls.
.E
Economics
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