Quiz #13

• 1. It is reported that large international buyers of US Government treasury bonds are getting worried that the US deficit is getting too large. If they stop buying the bonds then
• this will lead to the US dollar being abandoned as the convertible currency.
• this may drive up treasury bond yields but cannot reduce the capacity of the US Government to service its spending program.
• the US Government will run out of money and will have to cut back on its spending.
• 2. The fact that the US dollar is the strongest international currency and is in high demand by international investors (including foreign governments) means that the US Government
• has a greater capacity to engage in fiscal expansion because there are more sources of funding available.
• has no greater capacity to engage in fiscal expansion than any other sovereign government.
• has to balance the inflationary pressures from pumping dollars into the economy with the political need to reduce unemployment.
• 3. If investors started to worry about the size of the Australian Government deficit and demand for federal public debt fell
• the rise in interest rates (yields) would reflect the desire of the Government to have higher interest rates.
• the rise in interest rates (yields) would reflect the fact that the deficits were drawing on scarce private savings and increasing competition for them.
• the rise in interest rates (yields) would require the Government to reduce net spending.
• 4. Even if the government issues debt voluntarily in association with its deficits, the public debt is still
• inherited by the next generation and reduces their possibilities as a consequence.
• is a benefit to existing investors who voluntarily choose them at the issue prices over holding other assets including low return bank reserves.
• ultimately reduces the capacity of the government to continue spending.
• 5. When the Australian government issues debt it logically
• increases the assets that are held by the non-government sector $-for-$.
• reduces the capacity of the private sector to borrow from banks because they use their deposits to buy the bonds.
• has no impact on the overall holdings of assets held by the non-government sector $-for-$.