Quiz #119 answers

• 1. If the current account (on balance of payments) is in deficit and household saving increases as a proportion of disposable income then the government could still run a surplus without a decline in output and income occurring.

Answer: True

• 2. Quantitative easing tries to stimulate economic activity by reducing long-term investment rates whereas deficit spending adds to aggregate demand via tax cuts or direct public spending. Both expansionary efforts involve an increase in the net financial assets held by the non-government sector.

Answer: False

• 3. Politics aside, the US central bank could still increase interest rates even if the US government instructed it to directly purchase treasury debt to facilitate the national governments budget deficit.

Answer: True

• 4. A continuous budget deficit leads to public spending building up and an increase in the inflation risk faced by the economy.

Answer: False

• 5. Premium Question: Domestic deflation (reducing domestic wages and prices relative to other nations), which some Eurozone nations are pursuing because they effectively face a fixed exchange rate, may not increase export competitiveness.

Answer: True