Quiz #101 answers

• 1. A Fiscal Risk index which measures the vulnerability of a nation to public debt default is never applicable to a national government which issues its own floating currency.

Answer: False

• 2. The central bank cannot directly purchase treasury debt to facilitate the national governments budget deficit (that is, "monetise the deficit") if it targets a positive short-term policy rate.

Answer: False

• 3. Under current institutional arrangements, the change in the ratio of public debt to GDP will exactly equal the difference between government spending and tax revenue (the "primary deficit") plus the interest service payments on the outstanding stock of debt both expressed as ratios to GDP.

Answer: True

• 4. If the household saving ratio rises and there is an external deficit then Modern Monetary Theory tells us that the government must increase net spending to fill the private spending gap or else national output and income will fall.

Answer: False

• 5. Premium question: Quantitative easing and an expansion of net public spending both add net financial assets to the non-government sector but the former aims to stimulate demand by lowering interest rates while the latter policy choice more directly adds demand to the system.

Answer: False