Under an assumption of perfect capital mobility,suppose that international investors perceive the U.S.assets to be riskier than other countries during the Great Recession of 2008-09.The BP curve for the U.S would:
A) have upward slope.
B) have downward slope.
C) shift downward by the distance of risk premium.
D) shift upward by the distance of risk premium.

Question

Quizplus · Accepted Answer

Under perfect capital mobility, the BP curve reflects the market for loanable funds globally. If international investors perceive the US assets to be riskier than other countries during the Great Recession of 2008-09, they will demand a higher risk premium for investing in US assets. This will result in a shift upward of the BP curve by the distance of the risk premium. A higher BP curve implies a higher interest rate in the US, and a lower quantity of loanable funds demanded and supplied globally.

Under an Assumption of Perfect Capital Mobility,suppose That International Investors