Answer:
The answer is C. increase; decrease; increase
Explanation:
As the domestic interest rate remains unchanged, decreases in the riskiness of the domestic assets will help to increase the risk-adjusted return on domestic assets and as a result:
+ Stimulate foreign investors to start holding/ holding more domestic asset which means they will inject more capital into the country => Capital inflows increase
+ Discourage foreign investors from decreasing holding on domestic asset because they enjoy higher risk-adjusted return which means there will be less sales of domestic assets subsequently less capital outflows => Capital outflows decrease.
As net capital inflows = Capital inflows - Capital outflows, increase in capital inflows and decrease in capital outflows will Increase net Capital inflows
Thus, C is the correct choice.
