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

question 54

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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Definitions:

Conform

To act or be in accordance with established rules, standards, or laws.

Express Terms

Specific provisions and clauses explicitly stated in a contractual agreement or legal document.

Past Course

In contract law, this term refers to previous dealings and conduct between parties that establish a pattern of behavior relevant to understanding their current transaction.

Conflict

A serious disagreement, argument, or prolonged struggle between people, groups, or ideas.