Quiz #133 answers

• 1. Some "Occupy Wall Street" protesters are demanding that bank lending should be more closely regulated to ensure that all bank loans were backed by reserves held at the bank. However, this would unnecessarily reduce the capacity of the banks to lend.

Answer: False

• 2. Taxation creates unemployment.

Answer: True

• 3. Assume a nation is running an external surplus equivalent to 2 per cent of GDP and the private domestic sector is currently saving overall 1 per cent of GDP. In this situation, the government must be running:

Answer: A budget surplus equal to 1 per cent of GDP.

• 4. Start from a situation where the external surplus is the equivalent of 2 per cent of GDP and the budget surplus is 2 per cent. If the budget balance stays constant and the external surplus rises to the equivalent of 4 per cent of GDP then:

Answer: National income rises and the private surplus moves from 0 per cent of GDP to 2 per cent of GDP.

• 5. Premium Question: Assume a nation's public debt to GDP ratio rises to 100 per cent. The central bank keeps its nominal interest rate at zero and a zero inflation rate persists. Under these circumstances fiscal austerity packages that create recession can still reduce the public debt to GDP ratio, as long as the primary surplus to GDP ratio is greater than the negative GDP growth rate.

Answer: True