Quiz #126 answers

• 1. Issuing government debt reduces the risk of inflation arising from deficit spending because the private sector has less money to spend.

Answer: False

• 2. When the government matches it deficit with new debt issues the non-government sector wealth rises.

Answer: True

• 3. If net exports are running at 2 per cent of GDP, and the private domestic sector overall is saving an equivalent of 3 per cent of GDP, the government must be running a surplus equal to 1 per cent of GDP.

Answer: False

• 4. Choose the correct response (all balances expressed as a per cent of GDP):
  (a) A nation can export less than the sum of imports, net factor income (such as interest and dividends) and net transfer payments (such as foreign aid) and run a government surplus of equal proportion to GDP, while the private domestic sector is spending less than they are earning.
  (b) A nation can export less than the sum of imports, net factor income (such as interest and dividends) and net transfer payments (such as foreign aid) and run a government sector surplus of equal proportion to GDP, while the private domestic sector is spending more than they are earning.
  (c) A nation can export less than the sum of imports, net factor income (such as interest and dividends) and net transfer payments (such as foreign aid) and run a government sector surplus that is larger, while the private domestic sector is spending less than they are earning.
  (d) None of the above are possible as they all defy the sectoral balances accounting identity.

Answer: Option (b)

• 5. Premium question: To reduce the public debt ratio, the government has to eventually run primary budget surpluses (that is, spend less than they raise in taxes).

Answer: False