Assume that initially,the risk premium,ρ = 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. ,
ρ = Find the new domestic interest rate if a sterilized purchase of foreign assets adjusts A s.t.
(a)B - A = -.01/ (b)B - A = .01/ (c)B - A = .03/

Question

Assume that initially,the risk premium,ρ = 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. ,
ρ =  Find the new domestic interest rate if a sterilized purchase of foreign assets adjusts A s.t.
(a)B - A = -.01/  (b)B - A = .01/  (c)B - A = .03/

Quizplus · Accepted Answer

The Answer of Assume that initially,the risk premium,ρ = 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. ,
ρ =  Find the new domestic interest rate if a sterilized purchase of foreign assets adjusts A s.t.
(a)B - A = -.01/  (b)B - A = .01/  (c)B - A = .03/

Assume That Initially,the Risk Premium,ρ = 0 and That the Domestic