Central banks get the purchasing power to make discount loans by:
a. Reducing currency in circulation.
b. Buying government securities.
c. Taking loans from the government.
d. Increasing their liabilities in the form of deposits from banks.
Question 2
Assume that the government increases spending and finances the expenditures by borrowing in the domestic capital markets. If the nation has low mobility international capital markets and a flexible exchange rate system, what happens to the quantity of real loanable funds per time period and reserve-related (central bank) transactions in the context of the Three-Sector-Model?
a. The quantity of real loanable funds per time period falls, and reserve-related (central bank) transactions become more negative (or less positive).
b. The quantity of real loanable funds per time period falls, and reserve-related (central bank) transactions remains the same.
c. The quantity of real loanable funds per time period and reserve-related (central bank) transactions remain the same.
d. The quantity of real loanable funds per time period rises, and reserve-related (central bank) transactions remains the same.
e. There is not enough information to determine what happens to these two macroeconomic variables.
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