Quiz #14

• 1. Countries that entered the current crisis with budget surpluses or smaller deficits will as a result
• have a better chance of minimising the real damage from the downturn because they have more fiscal room to provide stimulus.
• have no better or worse chance of minimising the real damage from the downturn.
• encounter less chance of stifling their recoveries through inflation.
• 2. Rising long-term bond yields are evidence that
• government borrowing is causing funds to dry up on that segment of the yield curve.
• investors fear that the government will default on its debt or inflate it away.
• investors are diversifying their financial asset portfolios as their confidence grows.
• 3. If the central bank does not pay interest to the bank's on overnight reserves, then deficit spending by the treasury
• will put too much money in the system which ultimately is inflationary if the spending gap closes.
• will reduce short-term interest rates unless the central bank offers an interest-bearing government bond to the banks.
• will push up short-term interest rates if investors sense that inflation will be higher.
• 5. The automatic stabilisers
• operate to attenuate the business cycle in both directions but usually require discretionary spending adjustments to ensure full employment.
• will always get the budget back into balance because once growth resumes tax revenue rises and welfare spending falls.
• will always ensure that the economy will approach full employment because if spending is below potential tax revenue will keep falling and welfare spending rising.
• 4. Which of the following is not an example of inflation?
• Firms adjust their prices upwards to normal capacity levels after discounting them during the recession to maintain market share.
• The OPEC oil cartel announces that it will increase oil prices by 5 per cent per quarter over the next 5 years.
• The price of imports rises because the exchange rate depreciates by 10 per cent.

Quiz #14 answers

• 1. Countries that entered the current crisis with budget surpluses or smaller deficits will as a result

Answer: have no better or worse chance of minimising the real damage from the downturn.

Explanation: Please read Fiscal sustainability 101 - Part 3 for further material or post a comment if you want further explanation.

• 2. Rising long-term bond yields are evidence that

Answer: investors are diversifying their financial asset portfolios as their confidence grows.

Explanation: Please read Fiscal sustainability 101 - Part 3 for further material or post a comment if you want further explanation.

• 3. If the central bank does not pay interest to the bank's on overnight reserves, then deficit spending by the treasury

Answer: will reduce short-term interest rates unless the central bank offers an interest-bearing government bond to the banks.

Explanation: Please read Fiscal sustainability 101 - Part 3 for further material or post a comment if you want further explanation.

• 5. The automatic stabilisers

Answer: operate to attenuate the business cycle in both directions but usually require discretionary spending adjustments to ensure full employment.

Explanation: Please read Fiscal sustainability 101 - Part 3 for further material or post a comment if you want further explanation.

• 4. Which of the following is not an example of inflation?

Answer: The OPEC oil cartel announces that it will increase oil prices by 5 per cent per quarter over the next 5 years.

Explanation: Please read Fiscal sustainability 101 - Part 3 for further material or post a comment if you want further explanation.