Quiz #175 answers

• 1. The money supply is often defined to be the sum of currency on issue and demand deposits held in banks. The value of money declines if the money supply rises.

Answer: False

• 2. Economists note that the automatic stabilisers in the government's budget increase deficits (or reduce surpluses) in times of slack aggregate demand. This sensitivity of the budget outcome to the business cycle would not be eliminated if the government followed a fiscal rule such that it had to balance its budget at all times.

Answer: True

• 3. If the nation is running a current account deficit, then domestic households and firms and the government cannot simultaneously reduce their levels of indebtedness.

Answer: True

• 4. One advantage of low inflation is that the central bank can better use balance sheet management techniques to control yields on public debt at certain targetted maturities.

Answer: True

• 5. Premium Question: Modern Monetary Theory (MMT) demonstrates that a currency-issuing government has no intrinsic financial constraint and any constraints that are observed in practice reflect voluntary decisions by government to restrict their options. It remains, however, that the inflation risk associated with government spending would be higher if such a government stopped issuing public debt to match its deficit spending.

Answer: False