Quiz #179

• 1. Over a given business cycle (peak to peak), if a nation's external sector is on average balanced and the government gap between its tax revenue and spending is, on average, equal to 1 per cent of GDP, then the private domestic sector's spending-income balance will on average be in:
• Surplus of 1 per cent of GDP
• Deficit of 1 per cent of GDP
• 2. Considering only the initial impact on national income (ignoring multiplier effects), fiscal austerity will have a greater negative effect on real GDP if it manifests as a spending cut of $x than if the government chose to raise a value added tax to generate $x revenue at the current level of national income.
• False
• True
• 3. During a recession, if the government uses expansionary fiscal policy to restore trend real GDP growth it will restore full employment.
• False
• True
• 4. At present, private domestic sectors around the world are locked in a process of deleveraging with private households increasing their saving ratios and firms are declining to invest. To avoid the employment losses arising from this lost private spending, governments need to expand public deficits.
• False
• True
• 5. Premium Question: If the external sector is accumulating financial claims on the local economy (that is, providing foreign savings to the domestic economy) and the GDP growth rate is lower than the real interest rate, then the private domestic sector and the government sector can run surpluses without damaging employment growth.
• False
• True