Quiz #10 answers

• 1. The Australian Treasury equates the NAIRU with full employment and uses this to calibrate their structural deficit estimates. Accordingly, these deficit estimates will be

Answer: biased upwards thus indicating, at any point in the business cycle, that the government fiscal stance is more expansionary than it actually is.

Explanation: Please read Structural deficits - the great con job! or post a comment for further discussion.

• 2. A national spending gap will emerge if desired domestic saving suddenly exceeds domestic investment. The sectoral balances relationship (from the national accounts) shows that

Answer: the resulting spending gap may manifest as a combination of rising net exports and/or rising budget deficits.

Explanation: Please read Norway and sectoral balances or post a comment for further discussion.

• 3. The experience of Norway with its strong net exports contribution shows that

Answer: running budget deficits will be sufficient to generate low levels of unemployment.

Explanation: Please read Norway and sectoral balances or post a comment for further discussion.

• 4. The rising public debt levels that we are seeing will have to be paid back as the debt matures. These payments and the associated interest servicing will

Answer: not reduce the room for other non-inflationary discretionary deficit spending because increasing imports will keep opening the spending gap that has to be "filled".

Explanation: Please read Norway and sectoral balances or post a comment for further discussion.

• 5. The Government could stimulate employment growth by cutting real wages across the board (which would not alter wage relativities unfairly)

Answer: only if the real wage cuts reduced the overall desire to save by the non-government sector.

Explanation: Please read Deficit spending 101 - Part 1 or post a comment for further discussion.