If a bank purchases government securities rather than lends funds, the:
a. M2 money supply does not rise.
b. M2 money supply rises, but not by as much as when the funds are lent.
c. M2 money supply rises by more than would be the case if the funds were lent.
d. M2 money supply rises by the same amount as if they were lent.
Question 2
Assume that the government increases spending and finances the expenditures by borrowing in the domestic capital markets. If the nation has highly mobile international capital markets and a flexible exchange rate system, what happens to the real risk-free interest rate and GDP Price Index in the context of the Three-Sector-Model?
a. The real risk-free interest rate rises, and GDP Price Index rises.
b. There is not enough information to determine what happens to these two macroeconomic variables.
c. The real risk-free interest rate and GDP Price Index remain the same.
d. The real risk-free interest rate falls, and GDP Price Index falls.
e. The real risk-free interest rate rises, and GDP Price Index falls.
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