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

question 56

Essay

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 = How much will the central bank have to reduce domestic assets A s.t.the domestic interest rate will increase by (a)1% (b)4%?

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