Quiz #134 answers

• 1. We are told that a country is running a small current account deficit and that the private domestic sector is saving overall. However, we cannot tell what the government budget balance will be as a percentage of GDP until we know the relative magnitudes of the other two balances.

Answer: False

• 2. The private sector is wealthier if the government matches its deficit spending with bond issues relative to if the government just spent without issuing bonds (that is, instructed the central bank to credit bank accounts).

Answer: False

• 3. Modern Monetary Theory (MMT) explains how central banks sell bonds to drain excess bank reserves in order to maintain their given interest rate setting. We know that the same outcome can be achieved by paying interest to the commercial banks on the same reserves. Ignoring any reserve requirements, this means that there is no need for government (via the central bank) to issue debt when it net spends.

Answer: False

• 4. Continuous budget deficits increase the stock of public spending which might increase the inflation risk if spending exceeds the real capacity of the economy to increase output.

Answer: False

• 5. Premium Question: To reduce trade deficits, Eurozone nations are seeking to restore export competitiveness (within the Eurozone) by domestic deflation (reducing domestic wages and prices relative to other nations) given they do not have a flexible exchange rate. However, export competitiveness may still fall no matter how much some nations deflate.

Answer: True