Evaluate the policy''s output effects in this situation

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Suppose that interest parity does not hold exactly, but that the true relationship is R = R^* + (E^e - E)/E + ρ, where ρ is a term measuring the differential riskiness of domestic versus foreign deposits. Suppose a permanent rise in domestic government spending, by creating the prospect of future government deficits, also raises ρ, that is, makes domestic currency deposits more risky. Evaluate the policy's output effects in this situation.

Reference no: EM131145324

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