If banks demand currency (e.g., Federal Reserve Notes) from the central bank, the effect is to:
a. Increase the nation's monetary base.
b. Decrease the nation's monetary base.
c. Leave the monetary base unchanged.
d. Increase the liabilities of the central bank.
e. None of the above is true.
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 GDP and reserve-related (central bank) transactions in the context of the Three-Sector-Model?
a. Real GDP falls, and reserve-related (central bank) transactions become more negative (or less positive).
b. Real GDP falls and reserve-related (central bank) transactions remain the same.
c. Real GDP and reserve-related (central bank) transactions remain the same.
d. Real GDP 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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