Assume that business investment spending rises, and the increase is funded by greater borrowing in the capital markets. If the nation has low mobility international capital markets and a fixed exchange rate system, what happens to the real exchange rate and monetary base in the context of the Three-Sector-Model? Assume the nominal exchange rate is stated as: (Foreign currency per Domestic
currency).
a. The real exchange rate rises and monetary base falls.
b. The real exchange rate and monetary base fall.
c. The real exchange rate and monetary base remain the same.
d. The real exchange rate falls and monetary base rises
e. There is not enough information to determine what happens to these two macroeconomic variables.
.A
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