Quiz #144

• 1. If austerity led to all national governments simultaneously running public surpluses (which is the aim) then it would be impossible for all their respective private domestic sectors to spend less than they earn.
• False
• True
• 2. A leakage from the spending system can occur via taxation, imports or saving which reduces the expenditure multiplier effect of government spending. Another leakage which reduces the expansionary impact of government deficit spending on aggregate demand occurs when the government matches the deficit with debt-issuance which drains private sector purchasing power.
• False
• True
• 3. With reserve requirements low or zero, bank lending is capital-constrained rather than reserve constrained. But that would change if, for example, the central bank forced banks to maintain a reserve ratio of 100 per cent.
• False
• True
• 4. The published government deficit outcome each year summarises the economic policy stance chosen by government.
• False
• True
• 5. Premium Question: In Year 1, the economy goes into recession with nominal GDP growth falling to minus -1 per cent for the year. The inflation rate is subdued at 1 per cent per annum. The outstanding public debt is equal to the value of the nominal GDP and the nominal interest rate is equal to 1 per cent (and this is the rate the government pays on all outstanding debt). The governments primary budget deficit is recorded as 1 per cent of GDP and the debt ratio rises by 3 per cent. In Year 2, the government stimulates the economy and pushes the budget deficit (net of interest payments) out to 2 per cent of GDP. This discretionary fiscal decision stimulates aggregate demand and the economy recovers with a 4 per cent nominal GDP growth rate. All other parameters are unchanged in Year 2. Under these circumstances, the rate of increase in the debt ratio will fall by an amount less than the rise in the budget deficit because of the real growth in the economy.
• False
• True
• 6. Special Santa Question: The largest challenge facing the world in the face of anthropomorphic climate change is:
• Santa might have to relocate as the North Pole melts.
• Increased drought and storm activity.
• Sea levels are rising.
• The glaciers are melting.

Quiz #144 answers

• 1. If austerity led to all national governments simultaneously running public surpluses (which is the aim) then it would be impossible for all their respective private domestic sectors to spend less than they earn.

Answer: True

• 2. A leakage from the spending system can occur via taxation, imports or saving which reduces the expenditure multiplier effect of government spending. Another leakage which reduces the expansionary impact of government deficit spending on aggregate demand occurs when the government matches the deficit with debt-issuance which drains private sector purchasing power.

Answer: False

• 3. With reserve requirements low or zero, bank lending is capital-constrained rather than reserve constrained. But that would change if, for example, the central bank forced banks to maintain a reserve ratio of 100 per cent.

Answer: False

• 4. The published government deficit outcome each year summarises the economic policy stance chosen by government.

Answer: False

• 5. Premium Question: In Year 1, the economy goes into recession with nominal GDP growth falling to minus -1 per cent for the year. The inflation rate is subdued at 1 per cent per annum. The outstanding public debt is equal to the value of the nominal GDP and the nominal interest rate is equal to 1 per cent (and this is the rate the government pays on all outstanding debt). The governments primary budget deficit is recorded as 1 per cent of GDP and the debt ratio rises by 3 per cent. In Year 2, the government stimulates the economy and pushes the budget deficit (net of interest payments) out to 2 per cent of GDP. This discretionary fiscal decision stimulates aggregate demand and the economy recovers with a 4 per cent nominal GDP growth rate. All other parameters are unchanged in Year 2. Under these circumstances, the rate of increase in the debt ratio will fall by an amount less than the rise in the budget deficit because of the real growth in the economy.

Answer: False

• 6. Special Santa Question: The largest challenge facing the world in the face of anthropomorphic climate change is:

Answer: Santa might have to relocate as the North Pole melts.