Question

When risk in one country (the DC) decreases, select all of the following that might occur, ceteris paribus: (2)

a) There is less uncertainty in domestic returns and a more favorable return trip at the moment, ceteris paribus
b) The domestic currency (DC) depreciates due to the lower risk
c) The financial account moves into surplus
d) Supply of the DC in the FX market increases, appreciating the DC
e) The domestic interest rate declines, ceteris paribus
f) The number of traders in that country decreases and the number of investors in that country increases

Answer 1

When risk decreases in a country, it can lead to less uncertainty in domestic returns, a depreciating domestic currency, and a decline in domestic interest rates.

Step-by-step explanation:

When risk in one country decreases, several things may occur ceteris paribus. Firstly, there may be less uncertainty in domestic returns and a more favorable return trip at the moment. This means that domestic investors may feel more confident in investing in their own country, leading to increased domestic investment. Secondly, the domestic currency may depreciate due to the lower risk. This is because lower risk may make the country less attractive for foreign investors, causing a decrease in demand for the domestic currency. Lastly, the domestic interest rate may decline ceteris paribus.