Quiz #17

• 1. If more people flow out of employment into unemployment than flow into employment from unemployment in any month, then the unemployment rate will
• rise because less people have work than in the last period.
• fall because the labour force declines as employment falls.
• cannot tell because we do not know what the flows between the labour force and non-participation were.
• 2. In a fixed coupon government bond auction, the higher is the demand for the bonds
• the lower the yields will be at that asset maturity but this tells us nothing about the effect of budget deficits on short-term interest rates.
• the higher the yields will be at that asset maturity which suggests that higher budget deficits will eventually drive short-term interest rates down.
• the lower the yields will be at that asset maturity which suggests that higher budget deficits will eventually drive short-term interest rates down.
• 3. The automatic stabilisers that are built into fiscal policy ensure that
• every decline in non-government spending will be attenuated by the rise in the budget deficit.
• eventually the economy will resume growth after non-government spending falls because the budget deficit rises.
• a rise in private saving does not cause a rise in unemployment.
• 4. A sovereign government does not have to issue debt to finance its spending. But the more public debt it voluntarily issues
• the less is the volume of investment funds in the non-government sector that can be used for other investments.
• the more difficult it is for banks to attract deposits to initiate loans from.
• the greater is non-government wealth held in the form of public debt.
• 5. It is argued that the deleveraging of the Japanese private sector helped Japan avoid recession in the 1990s because the increased savings provided the finance for the huge budget deficits.
• This statement is incorrect because the saving intentions of the private sector would have been thwarted if the government deficits had not have provided enough spending to allow the economy to grow.
• This statement is correct because the private saving does free up real resources that can be bought by the government and in this sense can be thought of as financing the deficit.
• This statement is partially correct because even though the government doesn't need to finance its deficits it still needs the fiscal space to net spend.