Question

•Temporary changes in fiscal policy are more effective in influencing output and employment in the short run:

–The rise in aggregate demand and output due to expansionary fiscal policy raises demand for real monetary assets, putting upward pressure on interest rates and on the value of the domestic currency

–To prevent an appreciation of the domestic currency, the central bank must buy foreign assets, thereby increasing the money supply and decreasing interest rates

–In effect, under fixed exchange rates an expansionary fiscal policy leads to an equivalent expansion in monetary policy, resulting in a larger impact on short-run output and no change to exchange rates

Answer 1

option (d) is the right answer .

Risk premium is the difference between actual return on investment and risk free return on assets . Actual rate of return is associated with risk and that will give the expected return on that assets . Option(a) is right because when there is large debt thene there is possibikity that borrowers may default on loan .Option (b) also gives solid reason for increasr in risk premium as foreign investor will deiversify their portfolio after certain lending amount to hedge risk. Foreign transaction is exposed to the exchange rate where any part can be benefitted or bear loss depending on the foreign exchange market. So, Option (c) is right .