1. Real wages in Greece rose during the Euro period leading up to the crisis because the rate of growth in earnings outstripped its low labour productivity growth.

Answer: False

2. Quantitative easing aims to stimulate aggregate demand by reducing long-term investment rates whereas deficit spending aims to stimulate aggregate demand via tax cuts or direct public spending. Both policies ultimately work by increasing the net financial assets held by the non-government sector.

Answer: False

3. In last week's 2012-13 Budget, the Australian government indicated that it aimed to achieve a budget surplus of 0.1 per cent of GDP in the next financial year. The aim underpins a massive fiscal shift from a budget deficit of around 3 per cent of GDP in 2011-12. If the actual budget outcome remains in deficit at the end of the next financial year the Australian government will be rightly considered not to have gone hard enough on its fiscal austerity plans.

Answer: False

4. Modern Monetary Theory (MMT) brings an understanding of the way central banks purchase and sell government bonds to manage liquidity in the overnight cash markets and thus sustain their target rate of interest. MMT also leads to the conclusion that a central bank could still increase interest rates even if the US government instructed it to directly purchase treasury debt to facilitate the national governments budget deficit.

Answer: True

5. Premium Question: In Year 1, the economy plunges into recession with nominal GDP growth falling to minus -1.0 per cent. 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 inflation rate is stable at 1 per cent per annum. The government's primary budget balance records a deficit equivalent to 1 per cent of GDP and the public debt ratio rises by 3 per cent. In Year 2, the government pushes the primary budget deficit out to 2 per cent of GDP and in doing so stimulates aggregate demand and the economy records a 4 per cent nominal GDP growth rate. All other parameters are unchanged in Year 2. Under these circumstances, the public debt ratio will rise but by an amount less than the rise in the budget deficit because of the real growth in the economy.

Answer: False