If a bank lends funds in the form of cash, then:
a. M1 and M2 do not change.
b. M2 stays the same, but M1 rises.
c. M2 stays the same, but M1 falls.
d. M2 rises, and M1 falls.
e. M1 and M2 rise.
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 net nonreserve-related international borrowing/lending in the context of the Three-Sector-Model?
a. The real risk-free interest rate rises, and net nonreserve-related international borrowing/lending becomes more negative (or less positive).
b. The real risk-free interest rate rises, and net nonreserve-related international borrowing/lending becomes more positive (or less negative).
c. The real risk-free interest rate falls, and net nonreserve-related international borrowing/lending becomes more negative (or less positive).
d. The real risk-free interest rate and net nonreserve-related international borrowing/lending remain the same.
e. There is not enough information to determine what happens to these two macroeconomic variables.
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Write the following in standard form