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Suppose interest parity does not hold exactly, but the true relationship is R = R + (E e E)/E + (B), where (B) is a
Suppose interest parity does not hold exactly, but the true relationship is R = R + (E e E)/E + (B), where (B) is a risk premium on domestic government bonds that positively depends on B. Suppose a TEMPORARY rise in domestic government spending is financed by issuing additional government debt (an increase in B) and makes domestic public bonds risk premium higher. Evaluate the policy's output effects in this situation.
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