Assume that initially, the risk premium, = 0 and that the domestic and foreign interest rates are given by R = .06, R* = .05. Suppose that the risk premium depends linearly on the difference between domestic government debt, B, and domestic assets of the central bank, A, i.e., = (B-A) Find the new domestic interest rate if a sterilized purchase of foreign assets adjusts A s.t.

(a) B-A = -.01/0 (b) B-A = .01/0