ECON3372 | Accounting in Economics - Boston university

12) In the interest rate parity condition with imperfect substitutes and a risk premium of ρ on the domestic bonds: A) an increased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency deposits (i.e. domestic – foreign return). B) a decreased stock of domestic government debt will raise the difference between the expected returns on domestic and foreign currency deposits (i.e. domestic – foreign return). C) an increased stock of domestic government debt will reduce the difference between the expected returns on domestic and foreign currency deposits (i.e. domestic – foreign return). D) an increased stock of domestic government debt will have no effect on the difference between the expected returns on domestic and foreign currency deposits (i.e. domestic – foreign return). E) a decreased stock of domestic government debt will have no effect on the difference between the expected returns on domestic and foreign currency deposits (i.e. domestic – foreign return).