In the United States (and in this course), financial institutions' reserves include:
a. Cash in the vault and deposits at other institutions.
b. Cash in the vault and deposits at the central bank.
c. Cash in the vault and AAA corporate securities.
d. Currency in circulation and checking accounts.
e. Short-term Treasury bills and government deposits are institutions'.
Question 2
Assume that the central bank increases the reserve requirement. 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 the nominal value of the domestic currency in the context of the Three-Sector-Model?
a. The real risk-free interest rate falls, and nominal value of the domestic currency falls.
b. There is not enough information to determine what happens to these two macroeconomic variables.
c. The real risk-free interest rate rises, and nominal value of the domestic currency falls.
d. The real risk-free interest rate rises, and nominal value of the domestic currency rises.
e. The real risk-free interest rate rises, and nominal value of the domestic currency remains the same.
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