Quiz #137 answers

• 1. If the government increases its budget deficit as a percentage of GDP it will squeeze the real resources available for private productive uses.

Answer: True

• 2. For a nation running a current account deficit, national income adjustments will ensure government budget is in deficit no matter what the government's intentions are if the private domestic sector is spending less than its income.

Answer: True

• 3. Central banks manipulate bank reserves to control its policy interest rate.

Answer: True

• 4. If the central bank chooses to pay a return on overnight reserves held by the commercial banks equal to the current policy rate then the overall level of reserves held by the latter will be higher than otherwise (ignore any reserve requirements).

Answer: True

• 5. Premium Question: Specific legal considerations aside, it would be impossible for a government to avoid issuing debt to the private sector when running a budget deficit while the central bank was targeting a positive short-term policy rate.

Answer: False