Quiz #164 answers

• 1. The non-government sector are wealthier when a government issues bonds by the government to match its budget deficit.

Answer: False

• 2. Ignoring any reserve requirements, a central bank will eliminate any need to conduct open market operations to ensure its target policy rate is achieved each day by paying a positive interest rate on overnight reserves.

Answer: False

• 3. Ignoring any reserve requirements, bank reserves will be higher than otherwise if the central bank pays a positive return on overnight reserves held by the commercial banks equal to its current policy rate.

Answer: True

• 4. When a country runs a small current account deficit and the private domestic sector is saving overall, the government budget balance will always be in deficit.

Answer: True

• 5. Premium question: Most major political parties around the world support the imposition of austerity budgets on their economies. The major difference is that so-called "progressives" prefer tax rises rather than spending cuts whereas so-called "conservatives" recommend spending cuts and privatisation. In terms of the initial impact on national income, which policy option will be more damaging - a tax increase which aims to increase tax revenue at the current level of national income by $x or a spending cut of $x?

Answer: Spending cut