Quiz #131 answers

• 1. Assume that a nation is continuously running an external deficit of 2 per cent of GDP. If the private domestic sector successfully spends less than its income, then we would always find a public sector deficit.

Answer: True

• 2. If economy-wide average nominal wages grow more slowly than the inflation rate then real income is being redistributed to profits.

Answer: False

• 3. The automatic stabilisers operate to return the government budget balance returns to its appropriate level once growth returns following a downturn.

Answer: False

• 4. The government has to issue debt if the central bank is targetting a non-zero policy rate and is reluctant to pay a return on excess bank reserves.

Answer: True

• 5. Premium Question: Assume that inflation and nominal interest rates are both constant and zero and a country has a public debt to GDP ratio of 100 per cent. The approach taken by those who support fiscal austerity is to run primary budget surpluses to stabilise and then reduce the debt ratio. Under the circumstances given, this strategy can still work if the economy contracts under the burden of the surpluses.

Answer: True