12. Suppose interest parity does not hold exactly, but the true relationship is R = R* +...

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12. Suppose interest parity does not hold exactly, but the true relationship is R = R* + (Ee - E)>E + r, where r is a term measuring the differential riskiness of domestic versus foreign deposits. Suppose a permanent rise in domestic government spending, by creating the prospect of future government deficits, also raises r, that is, makes domestic currency deposits more risky. Evaluate the policy’s output effects in this situation.

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International Finance Theory And Policy

ISBN: 9781292238739

11th Global Edition

Authors: Paul R. Krugman, Maurice Obstfeld, Marc Melitz

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