APFIVE Risk Premium and Interest Rate Adjustments
A small open economy experiences a sudden increase in its risk premium due to political instability. To maintain the same level of capital inflows, policymakers would need to:
A
Maintain real interest rates equal to foreign rates
B
Decrease domestic real interest rates to stimulate investment
C
Implement capital controls to prevent capital outflows
D
Allow domestic real interest rates to rise above foreign rates
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