Quiz #116 answers

• 1. The issuance of bonds by the government to match its net spending (budget deficit) augments the nominal wealth held by the non-government sector.

Answer: False

• 2. Ignoring any reserve requirements, a central bank will eliminate any need to conduct open market operations to ensure its target policy rate is achieved each day by paying a positive interest rate on overnight reserves.

Answer: False

• 3. Ignoring any reserve requirements, bank reserves will be higher than otherwise if the central bank pays a positive return on overnight reserves held by the commercial banks equal to its current policy rate.

Answer: True

• 4. When a country runs a small current account deficit and the private sector is saving overall, the government budget balance will always be in deficit.

Answer: True

• 5. Premium Question: Various governments are imposing austerity budgets on their economies. In Britain and the US, even "progressives"are supporting cutting net spending but prefer to focus on tax increases while the "conservatives" are recommending spending cuts and privatisation. In terms of the initial impact on national income, which policy option will be more damaging - a tax increase which aims to increase tax revenue at the current level of national income by $x or a spending cut of $x?

Answer: Spending cut