Central banks can increase the money supply by:
a. Buying government securities.
b. Selling foreign exchange.
c. Raising margin requirements.
d. All of the above.
e. None of the above.
Question 2
Assume that the central bank purchases government securities in the open market. 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 current international transactions in the context of the Three-Sector-Model?
a. There is not enough information to determine what happens to these two macroeconomic variables.
b. The real risk-free interest rate falls, and current international transactions become more positive (or less positive).
c. The real risk-free interest rate rises, and current international transactions remain the same.
d. The real risk-free interest rate rises, and current international transactions become more positive (or less negative).
e. The real risk-free interest rate and current international transactions remain the same.
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