The reserves of financial institutions:
a. Are assets that financial institution's try to keep at the legal limit.
b. Are made up mainly of government securities and high quality corporate bonds.
c. Include the liability called Borrowing from the central bank.
d. None of the above is correct.
e. Are the largest liability in a financial institution's balance sheet.
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 real GDP in the context of the Three-Sector-Model?
a. The real risk-free interest rate rises, and real GDP remains the same.
b. The real risk-free interest rate rises, and real GDP falls.
c. The real risk-free interest rate and real GDP remain the same.
d. The real risk-free interest rate falls, and real GDP rises.
e. There is not enough information to determine what happens to these two macroeconomic variables.
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