Quiz #15

• 1. Japan was able to keep interest rates at zero for 15 or more years because
• the Bank of Japan did not issue enough bonds to fully drain the reserves added by the large daily fiscal deficits.
• the economy was in such bad shape that there was no demand for funds and so lenders had to take low returns.
• the Bank of Japan were convinced that inflation was under control.
• 2. Taxation revenue will rise as the budget deficits rise because
• the higher net spending increases economic activity and more people become employed.
• the higher net spending ultimately has to be paid for even if in the short-run the government is not revenue-constrained.
• the higher net spending requires higher tax rates so that people will demand more currency.
• 3. The government deficits may ultimately lead to higher tax rates being imposed
• because the government will need more money to continue spending.
• because ultimately, whether we like it or not, the public debt has to be paid back.
• if nominal demand increases too fast in relation to the real capacity levels.
• 4. The German fiscal rule to ban deficits and run balanced budgets would work
• if private investment was always growing strongly.
• if desired non-government saving was always zero.
• if both consumption and private investment was always growing strongly.
• 5. If the economy has unemployed workers but cannot produce any more real output then the government
• will generate inflation if it wants to achieve full employment.
• has to increase net spending until the spending gap is filled if it wants to achieve full employment.
• has to raise taxation if it wants to achieve full employment.