The reserves of financial institutions:
a. Are made up mainly of government securities and high quality corporate bonds.
b. Are assets that financial institutions try to maximize.
c. Are assets that financial institution's try to keep at the legal limit.
d. None of the above is correct.
e. Are the largest liability in a financial institution's balance sheet.
Question 2
Assume that the central bank increases the reserve requirement. 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. The real risk-free interest rate and GDP Price Index remain the same.
c. The real risk-free interest rate falls, and GDP Price Index falls.
d. There is not enough information to determine what happens to these two macroeconomic variables.
e. The real risk-free interest rate rises, and GDP Price Index falls.
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