Assume that the government increases spending and finances the expenditures by borrowing in the domestic capital markets. If the nation has low mobility international capital markets and a flexible exchange rate system, what happens to the real risk-free interest rate and GDP Price Index in the context of the Three-Sector-Model?
a. The real risk-free interest rate rises, and GDP Price Index rises.
b. The real risk-free interest rate falls, and GDP Price Index falls.
c. The real risk-free interest rate rises, and GDP Price Index falls.
d. The real risk-free interest rate and GDP Price Index remain the same.
e. There is not enough information to determine what happens to these two macroeconomic variables.
.A
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