Central banks get the purchasing power to buy foreign exchange by:
a. Buying government securities.
b. Taking loans from the government.
c. Increasing their liabilities in the form of deposits from banks.
d. Actually, they are not able to buy or sell foreign exchange.
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 current international transactions in the context of the Three-Sector-Model?
a. The real risk-free interest rate falls, and current international transactions become more negative (or less positive).
b. The real risk-free interest rate rises, and current international transactions become more negative (or less positive).
c. The real risk-free interest rate and current international transactions remain the same.
d. The real risk-free interest rate rises, and current international transactions remain the same.
e. There is not enough information to determine what happens to these two macroeconomic variables.
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