If the Bank of America lends 100 million and the reserve requirement is 10, the monetary base:
a. Falls by 100 million.
b. Falls by 10 million.
c. Does not change.
d. Rises by 100 million.
e. Rises by 10 million.
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 the nominal value of the domestic currency in the context of the Three-Sector-Model?
a. The real risk-free interest rate rises, and nominal value of the domestic currency falls.
b. The real risk-free interest rate rises, and nominal value of the domestic currency remains the same.
c. There is not enough information to determine what happens to these two macroeconomic variables.
d. The real risk-free interest rate rises, and nominal value of the domestic currency rises.
e. The real risk-free interest rate falls, and nominal value of the domestic currency falls.
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