A nation's monetary base changes when:
a. Funds cross our imaginary line.
b. The federal government increases spending.
c. Central banks swap currencies with each other.
d. The central bank reduces the reserve requirement.
e. None of the above.
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 real risk-free interest rate and reserve-related (central bank) transactions in the context of the Three-Sector-Model?
a. The real risk-free interest rate falls, and reserve-related (central bank) transactions become more negative (or less positive).
b. The real risk-free interest rate rises, and reserve-related (central bank) transactions become more negative (or less positive).
c. The real risk-free interest rate and reserve-related (central bank) transactions remain the same.
d. The real risk-free interest rate rises, and reserve-related (central bank) transactions remain the same.
e. There is not enough information to determine what happens to these two macroeconomic variables.
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